ATTENTION: ALL COMPONENTS / QUESTIONS MUST BE FULLY ANSWERED -- DO NOT USE THE T

Question

ATTENTION: ALL COMPONENTS / QUESTIONS MUST BE FULLY ANSWERED -- DO NOT USE THE TEXTBOOK SOLUTIONS ALREADY IN PLACE

IF YOU ARE UNABLE TO ANSWER ALL COMPONENTS, PLEASE DO NOT ANSWER. THANK YOU! :)

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 . . . . . . . . . . . . . . . . . . . . . . . . $ 32
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20
Variable manufacturing overhead . . . . . . . . . . $ 4
Variable selling and administrative . . . . . . . . . $ 3
Fixed costs per year:
Fixed manufacturing overhead . . . . . . . . . . . . $ 660,000
Fixed selling and administrative expenses . . . $ 120,000
During its first year of operations, O’Brien produced 100,000 units and sold 80,000 units. During its second year of operations, it produced 75,000 units and sold 90,000 units. In its third year, O’Brien produced 80,000 units and sold 75,000 units. The selling price of the company’s product is $ 75 per unit.

Required: (ALL COMPONENTS OF ALL 4 QUESTIONS MUST BE ANSWERED -- DO NOT USE THE TEXTBOOK SOLUTIONS ALREADY FOUND IN THIS BOOK)

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 meanslast-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 meansfirst-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.

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.
b. Prepare an income statement for Year 1, Year 2, and Year 3.

Explanation / Answer

Requirement 1 a Unit product cost under variable costing with FIFO is $56 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 100000 75000 80000 Unit Sales 80000 90000 75000 Sales Revenue 6000000 6750000 5625000 75 Variable cost of goods manufactured Opening inventory 0 1120000 280000 Direct Materials 3200000 2400000 2560000 32 Direct Labor 2000000 1500000 1600000 20 Variable manufacturing overhead 400000 300000 320000 4 Variable cost of goods available for sale 5600000 5320000 4760000 56 Less : Closing Inventory 1120000 280000 560000 56 Cost of goods sold 4480000 5040000 4200000 56 Gross Contribution Margin 1520000 1710000 1425000 19 Less : Variable selling and administrative 240000 270000 225000 3 Contribution Margin 1280000 1440000 1200000 16 Fixed expenses 90000 Fixed manufacturing overhead 660000 660000 660000 Fixed selling and administrative expenses 120000 120000 120000 Total fixed expenses 780000 780000 780000 Net Operating Income(Loss) 500000 660000 420000 Requirement 2 a Unit product cost under variable costing with LIFO is $56 for all the three years b O' Brian Company Variable costing Income statement with LIFO Year 1 Year 2 Year 3 Per unit Unit produced 100000 75000 80000 Unit Sales 80000 90000 75000 Sales Revenue 6000000 6750000 5625000 75 Variable cost of goods manufactured Opening inventory 0 1120000 280000 Direct Materials 3200000 2400000 2560000 32 Direct Labor 2000000 1500000 1600000 20 Variable manufacturing overhead 400000 300000 320000 4 Variable cost of goods available for sale 5600000 5320000 4760000 56 Less : Closing Inventory 1120000 280000 560000 56 Cost of goods sold 4480000 5040000 4200000 56 Gross Contribution Margin 1520000 1710000 1425000 19 Less : Variable selling and administrative 240000 270000 225000 3 Contribution Margin 1280000 1440000 1200000 16 Fixed expenses Fixed manufacturing overhead 660000 660000 660000 Fixed selling and administrative expenses 120000 120000 120000 Total fixed expenses 780000 780000 780000 Net Operating Income(Loss) 500000 660000 420000 Requirement 3 a The unit product cost under absorption costing with FIFO is Year 1 Year 2 Year 3 Variable manufacturing cost 5600000 4200000 4480000 Fixed manufacturing overhead 660000 660000 660000 Total cost of production 6260000 4860000 5140000 Divide by production unit 100000 75000 80000 Unit product cost 62.6 64.8 64.25 b O' Brian Company Absorption costing Income statement with FIFO Year 1 Year 2 Year 3 Unit produced 100000 75000 80000 Unit Sales 80000 90000 75000 Sales Revenue 6000000 6750000 5625000 Variable cost of goods manufactured Opening inventory 0 1252000 324000 Direct Materials 3200000 2400000 2560000 Direct Labor 2000000 1500000 1600000 Variable manufacturing overhead 400000 300000 320000 Fixed manufacturing overhead 660000 660000 660000 Cost of goods available for sale 6260000 6112000 5464000 Less : Closing Inventory 1252000 324000 642500 Cost of goods sold 5008000 5788000 4821500 Gross Profit 992000 962000 803500 Variable selling and administrative 240000 270000 225000 Fixed selling and administrative expenses 120000 120000 120000 Total Selling and administrative 360000 390000 345000 Net Operating Income(Loss) 632000 572000 458500 Requirement 4 a The unit product cost under absorption costing with LIFO is Year 1 Year 2 Year 3 Variable manufacturing cost 5600000 4200000 4480000 Fixed manufacturing overhead 660000 660000 660000 Total cost of production 6260000 4860000 5140000 Divide by production unit 100000 75000 80000 Unit product cost 62.6 64.8 64.25 b O' Brian Company Absorption costing Income statement with LIFO Year 1 Year 2 Year 3 Unit produced 100000 75000 80000 Unit Sales 80000 90000 75000 Sales Revenue 6000000 6750000 5625000 Variable cost of goods manufactured Opening inventory 0 1252000 313000 Direct Materials 3200000 2400000 2560000 Direct Labor 2000000 1500000 1600000 Variable manufacturing overhead 400000 300000 320000 Fixed manufacturing overhead 660000 660000 660000 Cost of goods available for sale 6260000 6112000 5453000 Less : Closing Inventory 1252000 313000 634250 Cost of goods sold 5008000 5799000 4818750 Gross Profit 992000 951000 806250 Variable selling and administrative 240000 270000 225000 Fixed selling and administrative expenses 120000 120000 120000 Total Selling and administrative 360000 390000 345000 Net Operating Income(Loss) 632000 561000 461250

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