Exercise 7-6 Variable and Absorption Costing Unit Product Costs and Income State

Question

Exercise 7-6 Variable and Absorption Costing Unit Product Costs and Income Statements [LO7-1, L07-2] 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 Direct labor Variable manufacturing overhead Variable selling and administrative Fixed costs per year: Fixed manufacturing overhead $350,000 $260,000 Fixed selling and administrative During the year, the company produced 35,000 units and sold 25,000 units. The selling price of the company's product is $46 per unit. Required 1. Assume that the company uses absorption costing: a. Compute the unit product cost. b. Prepare an income statement for the year. 2. Assume that the company uses variable costing a. Compute the unit product cost. b. Prepare an income statement for the year.

Explanation / Answer

1A & 2A Unit Product Costs: Absorption Costing Variable Costing Fixed Manufacturing OH PU: Direct Material 11.00 11.00 Fixed Manufacturing OH 350000 Direct Labor 5.00 5.00 Total Units Produced 35000 Variable Manufacturing OH 2.00 2.00 Fixed Manufacturing OH PU: 10.00 Fixed Manufacturing OH* 10.00 Not Part of Cost Total 28.00 18.00 Note:: Fixed and Variable Selling Cost does not form part of Manufacturing Cost 1B Lynch Company Income Statement Sales 1150000 (25000*46) Less: Cost of Goods Sold(25000*28) 700000 (25000*28) Gross Contribution 450000 Less: Variable Selling Expense 50000 (25000*2) Less: Fixed Selling Expense 260000 Net Operating Income 140000 2B Lynch Company Income Statement Sales 1150000 (25000*46) Less: Cost of Goods Sold(25000*18) 450000 (25000*18) Gross Contribution 700000 Less: Variable Selling Expense 50000 (25000*2) Contribution Margin 650000 Less: Fixed Selling Expense 260000 Less: Fixed Manufacturing Expense 350000 Net Operating Income 40000

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