Exercise 6-6 Variable and Absorption Costing Unit Product Costs and Income Statements [LO6-1, LO6-2]

Lynch Company manufactures and sells a single product. The following costs were incurred during the companys first year of operations:

Variable costs per unit:
Manufacturing:
Direct materials		$ 12
Direct labor		$ 9
Variable manufacturing overhead		$ 2
Variable selling and administrative		$ 2
Fixed costs per year:
Fixed manufacturing overhead	$ 403,000
Fixed selling and administrative	$ 313,000

During the year, the company produced 31,000 units and sold 26,000 units. The selling price of the companys product is $55 per unit.

Required:

1.	Assume that the company uses absorption costing:

a.	Compute the unit product cost.

Unit product cost

b.	Prepare an income statement for the year.

Lynch Company
Absorption Costing Income Statement
Sales
Cost of goods sold
Gross margin
Total selling and administrative expense
Net operating income

2.	Assume that the company uses variable costing:

a.	Compute the unit product cost.

Unit product cost

b.

Prepare an income statement for the year.

Lynch Company
Variable Costing Income Statement
Sales
Variable expenses:
Variable cost of goods sold
Variable selling and administrative expense
		0
Contribution margin		0
Fixed expenses:
Fixed manufacturing overhead
Fixed selling and administrative expense
		0
Net operating income		$0