O’Brien Company manufactures and sells one product. The following information pe
ID: 2339336 • Letter: O
Question
O’Brien Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:
During its first year of operations, O’Brien produced 92,000 units and sold 74,000 units. During its second year of operations, it produced 77,000 units and sold 90,000 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 $79 per unit.
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.
Variable costs per unit: Manufacturing: Direct materials $29 Direct labor $15 Variable manufacturing overhead $6 Variable selling and administrative $1 Fixed costs per year: Fixed manufacturing overhead $580,000 Fixed selling and administrative expenses $120,000Explanation / Answer
Requirement 1 a Unit product cost under variable costing with FIFO is $50 for all the three years b O' Brian Company Variable costing Income statement with FIFO Year 1 Year 2 Year 3 Per unit Unit produced 92000 77000 89000 Unit Sales 74000 90000 84000 Sales Revenue 5846000 7110000 6636000 79 Variable cost of goods manufactured Opening inventory 0 900000 250000 Direct Materials 2668000 2233000 2581000 29 Direct Labor 1380000 1155000 1335000 15 Variable manufacturing overhead 552000 462000 534000 6 Variable cost of goods available for sale 4600000 4750000 4700000 50 Less : Closing Inventory 900000 250000 500000 50 Cost of goods sold 3700000 4500000 4200000 50 Gross Contribution Margin 2146000 2610000 2436000 29 Less : Variable selling and administrative 74000 90000 84000 1 Contribution Margin 2072000 2520000 2352000 28 Fixed expenses Fixed manufacturing overhead 580000 580000 580000 Fixed selling and administrative expenses 120000 120000 120000 Total fixed expenses 700000 700000 700000 Net Operating Income(Loss) 1372000 1820000 1652000
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