During Denton Company€™s first two years of operations, the company reported absorption costing net operating income as follows:

The company€™s $34 unit product cost is computed as follows:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Variable manufacturing overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Fixed manufacturing overhead ($350,000 ÷ 25,000 units) . . . . . . . . . . 14
Unit product cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $34
Production and cost data for the two years are given below:

Year 1 Year 2
Units produced . . . . . . . . . . 25,000 25,000
Units sold . . . . . . . . . . . . . . 20,000 30,000

Required:
1. Prepare a variable costing income statement for each year in the contribution format.
2. Reconcile the absorption costing and variable costing net operating income figures for eachyear.

Transcribed Image Text:

Year 1 Year 2 Sales (at $50 per unit). Cost of goods sold $1,000,000 $1,500,000 Beginning inventory. Add cost of goods manufactured (at $34 per unit). Goods available for sale Less ending inventory (at $34 per unit) 170,000 850,000 850,000 1.020,000 0 680,000 1.020,000 480,000 340,000 .. .$ 10,000 140,000 0 850,000 . . 170,000 Cost of goods sold Gross margin Net operating income $3 per unit variable: $250,000 fixed each year 320,000 310,000