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Problem - Dowell Company produces a single product. Its income statements under absorption costing for its first two years of operation follow.
2016
2017
Sales ($44 per unit)
$1,056,000
$1,936,000
Cost of goods sold ($29 per unit)
696,000
1,276,000
Gross margin
360,000
660,000
Selling and administrative expenses
288,000
328,000
Net income
$72,000
$332,000
Additional information -
a. Sales and production data for these first two years follow.
Units produced
34,000
Units sold
24,000
44,000
b. Variable cost per unit and total fixed costs are unchanged during 2016 and 2017. The company's $29 per unit product cost consists of the following.
Direct materials $6
Direct labor 9
Variable overhead 4
Fixed overhead ($340,000/34,000 units) 10
Total product cost per unit $29
c. Selling and administrative expenses consist of the following.
Variable selling and administrative expenses ($2 per unit)
$48,000
$88,000
Fixed selling and administrative expenses
240,000
Total selling and administrative expenses
$288,000
$328,000
Required -
1. Complete income statements for the company for each of its first two years under variable costing.
2. What are the differences between the absorption costing income and the variable costing income for these two years?
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