Chapter 6, Problem 1PSA

Dowell Company produces a single product, its income statement under absorption costing for its first two year of operation follow.

	2014	2015
Sales ($46 per unit)	$920,000	$1,840,000
Cost of goods sold ($31 per unit)	620,000	1,240,000
Gross margin	300,000	600,000
Selling and administrative expenses	290,000	340,000
Net income	$ 10,000	$260,000

Additional Information

1. Sales and production date for these first two years follow:

	2014	2015
Units produced	30,000	30,000
Units sold	20,000	40,000

1. Variable cost per unit and total fixed costs are unchanged during 2014 and 2015. The company’s per unit product cost consists of the following.

Direct materials	$ 5
Direct labor	9
Variable overhead	7
Fixed overhead ($300,000/30,000 units)	10
Total product cost per unit	$31

1. Selling and administrative expenses consist of the following.

	2014	2015
Variable selling and administrative expenses ($250 per unit)	$50,000	$100,000
Fixed selling and administrative expenses	240,000	240,000
Total selling and administrative expenses	$290,000	$340,000

Required

1. Prepare income statements for the company for each of its first two year under variable costing.
2. Explain any difference between the absorption costing income and the variable costing income for these two years.