Required information The following information applies to th

Required information

[The following information applies to the questions displayed below.]

Inner Secret T Shirt Company produces 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 91,000 units and sold 79,000 units. During its second year of operations, it produced 81,000 units and sold 88,000 units. In its third year, O’Brien produced 88,000 units and sold 83,000 units. The selling price of the company’s product is $74 per unit.

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.

Variable costs per unit:
Manufacturing:
Direct materials	$	30
Direct labor	$	14
Variable manufacturing overhead	$	6
Variable selling and administrative	$	4
Fixed costs per year:
Fixed manufacturing overhead	$	550,000
Fixed selling and administrative expenses	$	160,000

Solution

Construct The Absorption Costing Unit Product Cost Year 1 Year 2 Year 3 Direct Material 30 30 30 Direct labour 14 14 14 Variable Manufacturing overheads 6 6 6 Fixed Manufacturing overheads 6.04 6.79 6.25 (550000/91000) (550000/81000) (550000/88000) Absorption costing unit prroduct cost 56.04 56.79 56.25 Construct the Absorption Costing Income Statement Under FIFO Year 1 Year 2 Year 3 Sales $5,846,000 $6,512,000 6142000 Cost of Goods sold 4427160 4992270 4668750 (79000*56.04) (81000*56.79+7000*56.04) (83000*56.25) Gross Margin $1,418,840 $1,519,730 1473250 Selling and distribution expense 476,000 512,000 492000 Net operating income 942,840 1,007,730 981250