Walsh Company manufactures and sells one product. The following information pert

Question

Walsh Company manufactures and sells one product. The following information pertains to each of the company’s first two years of operations: Variable costs per unit: Manufacturing: Direct materials $ 30 Direct labor $ 17 Variable manufacturing overhead $ 6 Variable selling and administrative $ 5 Fixed costs per year: Fixed manufacturing overhead $ 240,000 Fixed selling and administrative expenses $ 70,000 During its first year of operations, Walsh produced 50,000 units and sold 40,000 units. During its second year of operations, it produced 40,000 units and sold 50,000 units. The selling price of the company’s product is $51 per unit. Required: 1. Assume the company uses variable costing: a. Compute the unit product cost for year 1 and year 2. b. Prepare an income statement for year 1 and year 2. 2. Assume the company uses absorption costing: a. Compute the unit product cost for year 1 and year 2. (Round your answer to 2 decimal places.) b. Prepare an income statement for year 1 and year 2. (Round your intermediate calculations to 2 decimal places.) 3. Reconcile the difference between variable costing and absorption costing net operating income in year 1 and year 2. (Loss and deduction amounts should be indicated with a minus sign.)

Explanation / Answer

1) Number of units sold 40000 50000 Variable element Fixed Element Amount Amount Selling price 51 = 40000 x 51 2040000 = 50000 x 51 2550000 Variable cost per unit Direct material 30 1200000 1500000 Direct Labor 17 680000 850000 Manufacturing Overhead 6 240000 300000 Selling overhead 5 200000 250000 Total variable cost per unit 58 2320000 2900000 Contribution Sale - Variabe cost -280000 -350000 Fixed cost Manufacturing 240000 240000 240000 Selling & administrative 70000 70000 70000 Total Fixed cost 310000 310000 310000 Operating income -590000 -660000 Under Variable costing overheads are nit absorbed on total units produced, as in case of Absorption costing Under This Fixed cost are taken seperately to be recovered as whole on actual units sold, and not as per unit cost Now we can compute total cost of product in Year 1 & year 2 as Year 1 Year 2 Total Variable cost 2320000 2900000 Total Fixed cost 310000 310000.0000 Total cost 2630000 3210000 Number of Units sold 40000 50000 Per unit cost 65.75 64.2

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