Question

Ogilvy Company manufactures and sells one product. The following information pertains to each of the company's first three years of operations: $ 22 Variable cost per unit: Direct materials Fixed costs per year: Direct labor Fixed manufacturing overhead Fixed selling and administrative expenses $ 910,000 $ 837,000 $ 236,000 The company does not incur any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, Ogilvy produced 65,000 units and sold 65,000 units. During its second year of operations, it produced 65,000 units and sold 62,200 units. In its third year, Ogilvy produced 65,000 units and sold 67,800 units. The selling price of the company's product is $53 per unit. Required: 1. Assume the company uses super-variable costing: a. Compute the unit product cost for Year 1, Year 2, and Year 3. b. Prepare an income statement for Year 1, Year 2, and Year 3. 2. Assume the company uses a variable costing system that assigns $14 of direct labor cost to each unit produced: a. Compute the unit product cost for Year 1, Year 2, and Year 3. b. Prepare an income statement for Year 1, Year 2, and Year 3. 3. Reconcile the difference between the super-variable costing and variable costing net operating incomes in Years 1, 2, and 3.

Answer 1

		Unit product
Req 1A)		cost
	Year 1	22
	year 2	22
	year 3	22
				65,000	62,200	67,800
Req 1B)	Super Variable costing income statement
				Year 1	Year 2	Year 3
	Sales			3445000	3296600	3593400
	Variable cost of goods sold			1430000	1368400	1491600
	Contribution margin			2015000	1928200	2101800
	Fixed expenses:
	Direct Labor			910,000	910,000	910,000
	fixed manufacturing overhead			837,000	837,000	837,000
	Fixed selling and Administrative			236,000	236,000	236,000
	Total fixed expenses			1,983,000	1,983,000	1,983,000
	Net operating income(loss)			32,000	-54,800	118,800
		Unit product
Req 2A		cost
	Year 1	36
	year 2	36
	year 3	36
Req 2B)				65,000	62,200	67,800
	Variable costing income statement
				Year 1	Year 2	Year 3
	Sales			3445000	3296600	3593400
	Variable cost of goods sold			2340000	2239200	2440800
	Contribution margin			1105000	1057400	1152600
	Fixed expenses:
	fixed manufacturing overhead			837,000	837,000	837,000
	Fixed selling and Administrative			236,000	236,000	236,000
	Total fixed expenses			1,073,000	1,073,000	1,073,000
	Net operating income(loss)			32,000	-15,600	79,600
Req 3						Year 1	Year 2	Year 3
	Super- variable Costing net operating income (loss)					32,000	-54,800	118,800
	Direct labor cost deferred in inventory under variable costing					0	39200
	Direct labor cost releasedin beginning inventory under variable costing							-39,200
	Variable Costing net operating income (loss)					32,000	-15,600	79,600