Question

2. Lynch Company manufactures and sells a single product. The following costs were incurred during the company’s first year of operations:

Variable costs per unit:
Manufacturing:
Direct materials	$	12
Direct labor	$	6
Variable manufacturing overhead	$	3
Variable selling and administrative	$	3
Fixed costs per year:
Fixed manufacturing overhead	$	276,000
Fixed selling and administrative	$	186,000

During the year, the company produced 23,000 units and sold 19,000 units. The selling price of the company’s product is $50 per unit.

Required:

1. Assume that the company uses absorption costing:

a. Compute the unit product cost.

b. Prepare an income statement for the year.

2. Assume that the company uses variable costing:

a. Compute the unit product cost.

b. Prepare an income statement for the year.

3. Haas Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:

Answer 1

1a) Calculation of unit Product cost

Unit cost = 12 + 6 + 3 + (276,000/23,000)

=33

1b)

Sales	$    950,000.00
Less: Variable cost	$ (627,000.00)
Less: Variable selling and administration expense	$    (57,000.00)
Less: Fixed Selling and administration Expense	$ (186,000.00)
Net Profit	$      80,000.00

2a)

Unit cost = 12 + 6 + 3

=21

2b)

Sales	$    950,000.00
Less: Variable cost	$ (399,000.00)
Less: Variable selling and administration expense	$    (57,000.00)
Contribution	$    494,000.00
Less: Fixed Selling and administration Expense	$ (186,000.00)
Less: Fixed manufacturing overhead	$ (276,000.00)
Net Profit	$      32,000.00