O’Brien Company manufactures and sells one product. The following information pe
ID: 2567821 • 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 97,000 units and sold 75,000 units. During its second year of operations, it produced 81,000 units and sold 98,000 units. In its third year, O’Brien produced 82,000 units and sold 77,000 units. The selling price of the company’s product is $77 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.
2. Assume the company uses variable costing and a LIFO inventory flow assumption (LIFO means last-in first-out. In other words, it assumes that the newest 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.
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.)
b. Prepare an income statement for Year 1, Year 2, and Year 3. (Round your intermediate calculations to 2 decimal places.)
4. Assume the company uses absorption costing and a LIFO inventory flow assumption (LIFO means last-in first-out. In other words, it assumes that the newest 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.)
b. Prepare an income statement for Year 1, Year 2, and Year 3.
Variable costs per unit: Manufacturing: Direct materials $30 Direct labor $14 Variable manufacturing overhead $5 Variable selling and administrative $3 Fixed costs per year: Fixed manufacturing overhead $550,000 Fixed selling and administrative expenses $110,000Explanation / Answer
1.
a. Calculation of unit product cost under variable costing
Particulars
Year 1
Year 2
Year 3
Units Produced
97,000
81,000
82,000
Variable costs:
Direct Materials
30
30
30
Labor
14
14
14
Variable manufacturing overhead
5
5
5
Unit product Cost
49
49
49
b. Income Statement under FIFO Method
Particulars
Year 1
Year 2
Year 3
Sales Revenue(A)
5,775,000
7,546,000
5,929,000
Variable cost of goods Sold
Opening Inventory
0
1078,000
245,000
Add: Production
4,753,000
3,969,000
4,018,000
Less: Closing Inventory
(1078,000)
(245,000)
(490,000)
Cost of Goods Sold(B)
3,675,000
4,802,000
3,773,000
Gross Margin(A-B)
2,100,000
2,744,000
2,156,000
Less: Fixed Overheads
550,000
550,000
550,000
Less: Selling & Admin Variable
225,000
294,000
231,000
Less: Fixed Selling & Admin
110,000
110,000
110,000
Net Income
1,215,000
1,790,000
1,265,000
Particulars
Year 1
Year 2
Year 3
Units Produced
97,000
81,000
82,000
Variable costs:
Direct Materials
30
30
30
Labor
14
14
14
Variable manufacturing overhead
5
5
5
Unit product Cost
49
49
49
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