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)	$	966,000		$	1,886,000
Cost of goods sold ($31 per unit)		651,000			1,271,000
Gross margin		315,000			615,000
Selling and administrative expenses		282,000			322,000
Net income	$	33,000		$	293,000

Additional Information

1. Sales and production data for these first two years follow.

	2016		2017
Units produced	31,000		31,000
Units sold	21,000		41,000

2. 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	$	4
Direct labor		9
Variable overhead		8
Fixed overhead ($310,000/31,000 units)		10
Total product cost per unit	$	31

3. Selling and administrative expenses consist of the following.

		2016			2017
Variable selling and administrative expenses ($2 per unit)	$	42,000		$	82,000
Fixed selling and administrative expenses		240,000			240,000
Total selling and administrative expenses	$	282,000		$	322,000

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.)

DOWELL Company
Variable Costing Income Statements
	2016	2017
Net income (loss)

Answer 1

1
Variable Costing Income Statements
	2016	2017
Sales	966000	1886000
Less: Variable costs
Direct materials	84000	164000
Direct labor	189000	369000
Variable overhead	168000	328000
Variable selling and administrative expenses	42000	82000
Total variable costs	483000	943000
Contribution margin	483000	943000
Less: Fixed expenses
Fixed overhead	310000	310000
Fixed selling and administrative expenses	240000	240000
Total Fixed expenses	550000	550000
Net income(loss)	(67000)	393000
Workings:
	2016	2017
Direct materials	=21000*4	=41000*4
Direct labor	=21000*9	=41000*9
Variable overhead	=21000*8	=41000*8
Variable selling and administrative expenses	=21000*2	=41000*2