Question

Required information

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Inner Secret T Shirt Company produces and sells one product. The following information pertains to each of the company’s first three years of operations:

Variable costs per unit:
Manufacturing:
Direct materials	$	28
Direct labor	$	17
Variable manufacturing overhead	$	3
Variable selling and administrative	$	4
Fixed costs per year:
Fixed manufacturing overhead	$	500,000
Fixed selling and administrative expenses	$	130,000

During its first year of operations, O’Brien produced 93,000 units and sold 73,000 units. During its second year of operations, it produced 80,000 units and sold 95,000 units. In its third year, O’Brien produced 89,000 units and sold 84,000 units. The selling price of the company’s product is $73 per unit.

Required:

1. Assume the company uses variable costing and a FIFO inventory flow assumption (FIFO means first-in first-out. In other words, it assumes that the oldest units in inventory are sold first):

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.

Answer 1

a)

	Year 1	2	3
Direct material	28	28	28
Direct labor	17	17	17
Variable manufacturing overhead	3	3	3
Unit product cost	48	48	48

b)

	Year1	Year2	year3
Unit sold	73000	95000	84000
sales revenue	5329000    [73000*73]	6935000	6132000
less:variable expense
variable cost of sales	(3504000)   [73000*48]	(4560000)	(4032000)
variable selling and administrative	(292000)     [73000*4]	(380000)	(336000)
Total variable cost	(3796000)	(4940000)	((4368000)
contribution margin	1533000	1995000	1764000
less:fixed cost
Fixed manufacturing overhead	(500000)	(500000)	(500000)
Fixed selling and administrative expenses	(130000)	(130000)	(130000)
Total fixed cost	(630000)	(630000)	(630000)
Net Income	903000	1365000	1134000