O’Brien Company manufactures and sells one product. The following information pe

Question

O’Brien Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:

Variable costs per unit:

Manufacturing:

Direct materials

$29

Direct labor

$16

Variable manufacturing overhead

$6

Variable selling and administrative

$2

Fixed costs per year:

Fixed manufacturing overhead

$580,000

Fixed selling and administrative expenses

$180,000

During its first year of operations, O’Brien produced 98,000 units and sold 76,000 units. During its second year of operations, it produced 76,000 units and sold 93,000 units. In its third year, O’Brien produced 86,000 units and sold 81,000 units. The selling price of the company’s product is $78 per unit.

3. Assume the company uses absorption 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. (Round your intermediate calculations and final answers to 2 decimal places.)

Unit Product Cost

Year 1

Year 2

Year 3

b. Prepare an income statement for Year 1, Year 2, and Year 3. (Round your intermediate calculations to 2 decimal places.)

O’Brien Company

Absorption Costing Income Statement

Year 1

Year 2

Year 3

Variable costs per unit:

Manufacturing:

Direct materials

$29

Direct labor

$16

Variable manufacturing overhead

$6

Variable selling and administrative

$2

Fixed costs per year:

Fixed manufacturing overhead

$580,000

Fixed selling and administrative expenses

$180,000

Explanation / Answer

Unit product Cost :

Absorption costing income statement :

Year 1 Year 2 Year 3 Direct material 29 29 29 Direct labour 16 16 16 Variable manufacturing overhead 6 6 6 Fixed manufacturing overhead 5.92 7.63 6.74 Unit product Cost 56.92 58.63 57.74

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