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)	$	1,104,000		$	2,024,000
Cost of goods sold ($31 per unit)		744,000			1,364,000
Gross margin		360,000			660,000
Selling and administrative expenses		287,000			322,000
Net income	$	73,000		$	338,000

Additional Information

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

	2016		2017
Units produced	34,000		34,000
Units sold	24,000		44,000

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	$	5
Direct labor		8
Variable overhead		8
Fixed overhead ($340,000/34,000 units)		10
Total product cost per unit	$	31

3. Selling and administrative expenses consist of the following.

		2016			2017
Variable selling and administrative expenses ($1.75 per unit)	$	42,000		$	77,000
Fixed selling and administrative expenses		245,000			245,000
Total selling and administrative expenses	$	287,000		$	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.)

Answer 1

Calculation:

Direct Materials, Year 2016 = 24,000 * $5 = $120,000
Direct Materials, Year 2017 = 44,000 * $5 = $220,000

Direct Labor, Year 2016 = 24,000 * $8 = $192,000
Direct Labor, Year 2017 = 44,000 * $8 = $352,000

Variable Overhead, Year 2016 = 24,000 * $8 = $192,000
Variable Overhead, Year 2017 = 44,000 * $8 = $352,000