Question

O’Brien Company manufactures 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	$26
Direct labor	$16
Variable manufacturing overhead	$3
Variable selling and administrative	$1
Fixed costs per year:
Fixed manufacturing overhead	$510,000
Fixed selling and administrative expenses	$120,000

During its first year of operations, O’Brien produced 97,000 units and sold 80,000 units. During its second year of operations, it produced 84,000 units and sold 96,000 units. In its third year, O’Brien produced 82,000 units and sold 77,000 units. The selling price of the company’s product is $75 per unit.

4. Assume the company uses absorption costing and a LIFO inventory flow assumption (LIFO means last-in first-out. In other words, it assumes that the newest units in inventory are sold first):

a. Compute the unit product cost for Year 1, Year 2, and Year 3. (Round your intermediate calculations and final answers to 2 decimal places.)

	Unit Product Cost
Year 1
Year 2
Year 3

b. Prepare an income statement for Year 1, Year 2, and Year 3. (Round your intermediate calculations to 2 decimal places.)

O’Brien Company
Absorption Costing Income Statement
	Year 1	Year 2	Year 3
	0	0	0
	$0	$0	$0

Answer 1

Unit Product cost:
			Year1	Year2	Year3
Material cost per unit			26	26	26
labour cost per unit			16	16	16
Variabble Mfg OH per unit			3	3	3
Fixed Mfg OH per unit			5.26	6.07	6.22
			(510000/97000)	(510000/84000)	(510000/82000)
Unit product cost			50.26	51.07	51.22
Income Statement under Absorption Costing:
			Year1	YEar2	Year3
Sales revenue			6000000	7200000	5775000
Less: Cost of goods sold
Year1 (80000*50.26)			4020800
Year2(84000*51.07+12000*50.26)				4893000
Year3 (77000*51.22)					3943940
Gross Margin			1979200	2307000	1831060
Less: Selling and admin expense			200000	216000	197000
Net income			1779200	2091000	1634060