Question

Dowell Company produces a single product. Its income statements under absorption costing for its first two years of operation follow. 

	2018	2019
Sales ($46 per unit)	$1,150,000	$2,070,000
Cost of goods sold ($31 per unit)	775,000	1,395,000
Gross margin	375,000	675,000
Selling and administrative expenses	301,250	346,250
Net income	$73,750	$328,750

Additional Information 

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

	2018	2019
Units produced	35,000	35,000
Units sold	25,000	45,000

b. Variable cost per unit and total fixed costs are unchanged during 2018 and 2019. The company's $31 per unit product cost consists of the following. 

Direct materials	$6
Direct labor	8
Variable overhead	7
Fixed overhead ($300,000//30, 000 units )	10
Total product cost per unit	$31

c. Selling and administrative expenses consist of the following. 

	2018	2019
Variable selling and administrative expenses ($2.50 per unit )	$56,250	$101,250
Fixed selling and administrative expenses	245,000	245,000
Total selling and administrative expenses	$301,250	$346,250

1. Prepare 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

Solution: Dowell company Variable costing income statement 2018 2019 1150000 2070000 Sales Less : variable cost Direct material Direct labor Variable overhead variable selling and administrative expense 150000 200000 175000 56250 270000 360000 315000 101250 581250 1046250 568750 1023750 Total variable costs contribution margin Less : Fixed expenses Fixed selling and administrative expense Fixed over head 245000 350000 245000 350000 Total fixed expense Net income/(loss) 595000 -26250 595000 428750 25000*46 45000*46 wokring Sales Less : variable cost Direct material Direct labor Variable overhead 25000*6 25000*8 25000*7 45000*6 45000*8 45000*7