Question

ch 6 exer 4

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		$ 13
Direct labor		$ 10
Variable manufacturing overhead		$ 3
Variable selling and administrative		$ 3
Fixed costs per year:
Fixed manufacturing overhead	$ 352,000
Fixed selling and administrative	$ 262,000

    

During the year, the company produced 32,000 units and sold 27,000 units. The selling price of the company’s product is $56 per unit.

    

Required:

Assume that the company uses absorption costing:

    

a.	Compute the unit product cost.

          

Unit product cost

        

b.

Prepare an income statement for the year.

Lynch Company
Absorption Costing Income Statement
	0
	$0

               

Assume that the company uses variable costing:

   

c

Compute the unit product cost.

Unit product cost

               

d.

Prepare an income statement for the year.

Lynch Company
Variable Costing Income Statement
Variable expenses:
		0
		0
Fixed expenses:
		0
		$0

            

Answer 1

1a
Direct materials	13
Direct labor	10
Variable manufacturing overhead	3
Fixed manufacturing overhead	11	=352000/32000
Unit product cost	37
b
Absorption Costing Income Statement
Sales	1512000	=27000*56
Cost of goods sold	999000	=27000*37
Gross margin	513000
Selling and administrative expenses	343000	=262000+(27000*3)
Net operating income (loss)	170000
2a
Direct materials	13
Direct labor	10
Variable manufacturing overhead	3
Unit product cost	26
b
Variable Costing Income Statement
Sales		1512000
Less:
Variable cost of goods sold	702000
Variable selling expense	81000	783000
Contribution margin		729000
Less: Fixed expenses
Fixed selling and administrative expenses .	262000
Fixed manufacturing overhead	352000	614000
Net operating income (loss)		115000