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	$	18
Variable manufacturing overhead	$	5
Variable selling and administrative	$	2
Fixed costs per year:
Fixed manufacturing overhead	$	530,000
Fixed selling and administrative expenses	$	120,000

During its first year of operations, O’Brien produced 91,000 units and sold 74,000 units. During its second year of operations, it produced 80,000 units and sold 92,000 units. In its third year, O’Brien produced 87,000 units and sold 82,000 units. The selling price of the company’s product is $72 per unit.

Case 6-29 Part-3

3. Assume the company uses absorption 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. Fixed manufacturing overhead cost per unit = Fixed Manufacturing Overhead / Units Produced

	Year 1	Year 2	Year 3
Direct materials per unit	$ 26	$ 26	$ 26
Direct labor per unit	18	18	18
Variable manufacturing overhead per unit	5	5	5
Fixed manufacturing overhead per unit	5.82	6.63	6.09
Unit Product Cost	$ 54.82	$ 55.63	$ 55.09

b.

Income Statement
	Year 1	Year 2	Year 3
Sales Revenue	$ 5,328,000	$ 6,624,000	$ 5,904,000
Cost of Goods Sold
Cost of Beginning Inventory of Finished Goods	0	931,940	278,150
Add: Cost of Goods Manufactured	4,989,000	4,450,000	4,793,000
Cost of Goods Available for Sale	4,989,000	5,381,940	5,071,150
Less: Cost of Ending Inventory of Finished Goods	931,940	278,150	550,900
Cost of Goods Sold	4,057,060	5,103,790	4,520,250
Gross Profit	1,270,940	1,520,210	1,383,750
Selling and Administrative Expenses
Variable	148,000	184,000	164,000
Fixed	120,000	120,000	120,000
Net Operating Income	$ 1,002,940	$ 1,216,210	$ 1,099,750