Question

NEW MEXICO CORPORATION …… had the following operating data for its first two years of operations:...

NEW MEXICO CORPORATION

…… had the following operating data for its first two years of operations:

Variable costs per unit:

            Direct materials                                   $ 5.00

            Direct labor                                             3.00

            Variable overhead                                  1.50

Fixed costs per year:

            Overhead                                            $90,000

            Selling and administrative                   17,200

The company produced 30,000 units the first year and sold 25,000. In the 2nd year, it produced 25,000 units and sold 30,000 units. The selling price per unit each year was $15.

Required:

1. Prepare a comparative income statement (side by side) for the years 1 and 2, using absorption costing. Has the firm performance, as measured by income, improved or declined from Year 1 to Year 2?

2. Prepare comparative income statements for both years using variable costing. Has firm performance, as measured by income, improved or declined from Year 1 to Year 2?

3. Reconcile the difference between the income(s) shown between the two statements for each of the years.

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