Mitchell Company began operations this year. During this first year, the company produced 300,000 units and sold 250,000 units. Its income statement under absorption costing for its first year of operations follows.
Sales (250,000 units × $18 per unit) |
| $4,500,000 |
Cost of goods sold |
|
|
Beginning inventory | $ 0 |
|
Cost of goods manufactured (300,000 units × $7.50 per unit) | 2,250,000 |
|
Cost of goods available for sale | 2,250,000 |
|
Ending inventory (50,000 × $7.50) | 375,000 |
|
Cost of goods sold |
| 1,875,000 |
Gross margin |
| 2,625,000 |
Selling and administrative expenses |
| 2,200,000 |
Net income |
| $ 425,000 |
Additional Information
a.Selling and administrative expenses consist of $1,200,000 in annual fixed expenses and $4 per unit in variable selling and administrative expenses.
b.The company’s product cost of $7.50 per unit is computed as follows.
Direct materials | $2.00 per unit |
Direct labor | $2.40 per unit |
Variable overhead | $1.60 per unit |
Fixed overhead ($450,000/300,000 units) | $1.50 per unit |
Required
1.Prepare the company’s income statement under variable costing.
2.Explain any difference between the company’s income under variable costing (from part 1) and the income reported above.
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