Question

Variable costs per unit:
Manufacturing:
Direct materials	$	21
Direct labor	$	13
Variable manufacturing overhead	$	3
Variable selling and administrative	$	2
Fixed costs per year:
Fixed manufacturing overhead	$	400,000
Fixed selling and administrative expenses	$	60,000

During its first year of operations, Walsh produced 50,000 units and sold 40,000 units. During its second year of operations, it produced 40,000 units and sold 50,000 units. The selling price of the company’s product is $89 per unit.

Required:

1. Assume the company uses variable costing:

a. Compute the unit product cost for Year 1 and Year 2.

b. Prepare an income statement for Year 1 and Year 2.

2. Assume the company uses absorption costing:

a. Compute the unit product cost for Year 1 and Year 2.

b. Prepare an income statement for Year 1 and Year 2.

3. Reconcile the difference between variable costing and absorption costing net operating income in Year 1.

Assume the company uses variable costing. Prepare an income statement for Year 1 and Year 2.

Walsh Company Income Statement Year 1 Year 2 Sales $3,560,000 $4,450,000 Variable expenses: Variable selling and administrative 80,000 100,000 Variable cost of goods sold Total variable expenses 80,000 100,000 Contribution margin 3,480,000 4,350,000 Fixed expenses: Fixed manufacturing overhead 400,000 400,000 Fixed selling and administrative expense 60,000 60,000 Total fixed expenses 460,000 460,000 Net operating income (loss) $3,020,000 $3,890,000

Assume the company uses absorption costing. Prepare an income statement for Year 1 and Year 2. (Round your intermediate calculations to 2 decimal places.)

	Walsh Company Income Statement Year 1 Year 2 Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating income $0 $0

Answer 1