Ogilvy Company manufactures and sells one product. The following information per

Question

Ogilvy Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations: Variable cost per unit: Direct materials $ 31 Fixed costs per year: Direct labor $ 1,800,000 Fixed manufacturing overhead $ 850,000 Fixed selling and administrative expenses $ 296,000 The company does not incur any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, Ogilvy produced 75,000 units and sold 75,000 units. During its second year of operations, it produced 75,000 units and sold 70,200 units. In its third year, Ogilvy produced 75,000 units and sold 79,800 units. The selling price of the company’s product is $71 per unit. Required: 1. Assume the company uses super-variable costing: 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. 2. Assume the company uses a variable costing system that assigns $24 of direct labor cost to each unit produced: 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. 3. Reconcile the difference between the super-variable costing and variable costing net operating incomes in Years 1, 2, and 3.

Explanation / Answer

1 Super Variable costing Year 1 Year 2 Year 3 Direct material 31 31 31 Units manufactured 75000 75000 75000 Units sold 75,000 70,200 79,800 Income statement Sales revenue 5325000 4984200 5665800 Less Variable expense 2325000 2176200 2473800 Contribution margin 3000000 2808000 3192000 Less Fixed cost Direct labor 1800000 1800000 1800000 Fixed manufacturing overheads 850000 850000 850000 Fixed selling and administrative expense 296000 296000 296000 Total fixed expenses 2946000 2946000 2946000 Net operating income 54000 -138000 246000 2 Variable costing Year 1 Year 2 Year 3 Direct material 31 31 31 Direct Labor 24 24 24 Product cost 55 55 55 Units manufactured 75000 75000 75000 Units sold 75,000 70,200 79,800 Income statement Sales revenue 5325000 4984200 5665800 Less Variable expense Variable product cost 4125000 3861000 4389000 Total variable expense 4125000 3861000 4389000 Contribution margin 1200000 1123200 1276800 Less Fixed cost Fixed manufacturing overheads 850000 850000 850000 Fixed selling and administrative expense 296000 296000 296000 Total fixed expenses 1146000 1146000 1146000 Net operating income 54000 -22800 130800 3 Reconciliation Net operating income variable costing 54000 -22800 130800 Add Ending inventory Fixed manufacturing (24*4800) 0 -115200 115200 Net operating income supre variable costing 54000 -138000 246000

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