Chapter 4A, Problem 4A.1E

Super-Variable Costing Income Statement LO4—6

Zola Company manufactures and sells one product. The following information pertains to the company’s first year of operations:

The company does not incur any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, Zola produced 25,000 units and sold 20,000 units. The selling price of the company’s product is $50 per unit.

Required:

1. Assume the company uses super-variable costing:
1. Compute the unit product cost for the year.
2. Prepare an income statement for the year.

To determine

Concept introduction:

Income statement:

The income statement tells about the revenues earned and expenses incurred by the company in a specific period of time. It is also known as operations statement, earnings statement, revenue statement or profit, and loss statement.

1. Calculate the unit product cost.
2. Prepare an income statement for the given year.

Answer to Problem 4A.1E

1. The unit product cost is $18.
2. The income statement of Company Z is as follows:

Company Z
Income Statement
Particulars	Amount (Unit)(a)	Units(b)	Total amount(c = a × b)
Sales	$50	20000	$1,000,000
Less: Variable cost	($18)	20000	($360,000)
Contribution margin (a)			$640,000
Less: Fixed costs
Direct labor			$200,000
Fixed manufacturing cost			$250,000
Fixed selling and administration expenses			$80,000
Total fixed costs (b)			$530,000
Net operating income (c = a -b)			$110,000

Table: (1)

Explanation of Solution

(a)

Calculate the unit product cost:

The company uses the variable costing method. Under the variable costing method, the variable cost is considered as the product cost. In the given case, the variable cost of the product is $18.

Thus, the unit product cost is $18.

(b)

Prepare an income statement for the given year:

Company Z
Income Statement
Particulars	Amount (Unit)(a)	Units(b)	Total amount(c = a × b)
Sales	$50	20000	$1,000,000
Less: Variable cost	($18)	20000	($360,000)
Contribution margin (a)			$640,000
Less: Fixed costs
Direct labor			$200,000
Fixed manufacturing cost			$250,000
Fixed selling and administration expenses			$80,000
Total fixed costs (b)			$530,000
Net operating income (c = a -b)			$110,000

Table: (2)