Required information Skip to question [The following information applies to the questions displayed below.] 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 $ 27 Direct labor $ 16 Variable manufacturing overhead $ 3 Variable selling and administrative $ 3 Fixed costs per year: Fixed manufacturing overhead $ 590,000 Fixed selling and administrative expenses $ 190,000 During its first year of operations, O’Brien produced 96,000 units and sold 73,000 units. During its second year of operations, it produced 84,000 units and sold 102,000 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 $80 per unit. Required: 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.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Required information
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[The following information applies to the questions displayed below.]
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 | $ | 27 |
| Direct labor | $ | 16 |
| Variable manufacturing |
$ | 3 |
| Variable selling and administrative | $ | 3 |
| Fixed costs per year: | ||
| Fixed manufacturing overhead | $ | 590,000 |
| Fixed selling and administrative expenses | $ | 190,000 |
During its first year of operations, O’Brien produced 96,000 units and sold 73,000 units. During its second year of operations, it produced 84,000 units and sold 102,000 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 $80 per unit.
Required:
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.
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