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 ($48 per unit)	$	1,056,000		$	2,016,000
Cost of goods sold ($33 per unit)		726,000			1,386,000
Gross margin		330,000			630,000
Selling and administrative expenses		300,000			350,000
Net income	$	30,000		$	280,000

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 $33 per unit product cost consists of the following.

Direct materials	$	6
Direct labor		9
Variable overhead		8
Fixed overhead ($320,000/32,000 units)		10
Total product cost per unit	$	33

3. Selling and administrative expenses consist of the following.

		2016			2017
Variable selling and administrative expenses ($2.5 per unit)	$	55,000		$	105,000
Fixed selling and administrative expenses		245,000			245,000
Total selling and administrative expenses	$	300,000		$	350,000

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 Sales 1,056,000 $ 2,016,000 Less: Variable costs Direct materials Direct labor Variable overhead Variable selling and administrative expenses Contribution margin Less: Fixed expenses Fixed overhead Fixed selling and administrative costs Net income (loss)

Answer 1

Income Statement Under Variable Costing 2016 1056000 2017 2016000 Sales (@48) Variable Expense Direct Material (@6 Direct Labour (@9) Variable Manufacturing Overhead (@8) Variable Selling and Administrative Expense (@2.5) Total Varible Expenses Contribution Magin Fixed Expenses Fixed mufacturing Overheads Fixed Sellingand Administrative Expenses Total fixed Expenses Net Operating Income 132000 198000 176000 55000 561000 495000 252000 378000 336000 105000 1071000 945000 320000 245000 565000 -70000 320000 245000 565000 380000