Question

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Dowell Company produces a single product. Its income statements under absorption costing for its first two years of operation follow.

		2016			2017
Sales ($46 per unit)	$	1,150,000		$	2,070,000
Cost of goods sold ($31 per unit)		775,000			1,395,000
Gross margin		375,000			675,000
Selling and administrative expenses		301,250			346,250
Net income	$	73,750		$	328,750

Additional Information

Sales and production data for these first two years follow.

	2016		2017
Units produced	35,000		35,000
Units sold	25,000		45,000

Variable cost per unit and total fixed costs are unchanged during 2016 and 2017. The company's $31 per unit product cost consists of the following.

Direct materials	$	5
Direct labor		8
Variable overhead		8
Fixed overhead ($350,000/35,000 units)		10
Total product cost per unit	$	31

Selling and administrative expenses consist of the following.

		2016			2017
Variable selling and administrative expenses ($2.25 per unit)	$	56,250		$	101,250
Fixed selling and administrative expenses		245,000			245,000
Total selling and administrative expenses	$	301,250		$	346,250

1. Complete income statements for the company for each of its first two years under variable costing. (Loss amounts should be entered with a minus sign.)

Answer 1

	DOWELL COMPANY
	Variable costing Income Statements
	2016	2017
Sales	1150000	2070000
Less: Variable costs
Direct materials	125000	225000
Direct labor	200000	360000
Variable overhead	200000	360000
Variable selling and administrative expenses	56250	101250
Total variable costs	581250	1046250
Contribution margin	568750	1023750
Less: Fixed expenses
Fixed overhead	350000	350000
Fixed selling and administrative expenses	245000	245000
Total Fixed expenses	595000	595000
Net income (loss)	-26250	428750
Note:
For variable costs, multiply Direct materials , Direct labor , Variable overhead cost per unit by 25000 in 2016 and 45000 in 2017