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 ($44 per unit)	$	968,000		$	1,848,000
Cost of goods sold ($29 per unit)		638,000			1,218,000
Gross margin		330,000			630,000
Selling and administrative expenses		294,500			339,500
Net income	$	35,500		$	290,500

Additional Information

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

	2016		2017
Units produced	32,000		32,000
Units sold	22,000		42,000

2. Variable cost per unit and total fixed costs are unchanged during 2016 and 2017. The company's $29 per unit product cost consists of the following.

Direct materials	$	6
Direct labor		8
Variable overhead		5
Fixed overhead ($320,000/32,000 units)		10
Total product cost per unit	$	29

3. Selling and administrative expenses consist of the following.

		2016			2017
Variable selling and administrative expenses ($2.25 per unit)	$	49,500		$	94,500
Fixed selling and administrative expenses		245,000			245,000
Total selling and administrative expenses	$	294,500		$	339,500

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

Compute the Variable costing Unit Product cost
				Year 1	Year 2
Direct Material				6	6
Direct labour				8	8
Variable Manufacturing overheads				5	5
Variable costing unit prroduct cost				19	19
Construct The Variable Costing Income Statement under FIFO
				YEAR 1		YEAR 2
Sales					968,000		1,848,000
Less: Variable cost
variable cost of goods sold				418,000		798,000
Variable selling expense				49,500	467,500	94,500	892,500
Contribution margin					500,500		955,500
Fixed expense:
Fixed Manufacturing overheads					320,000		320,000
Fixed selling expense					245,000		245,000
Net operating Income					-64,500		390,500