Operating data for Fowler Company and its absorption costing income statements for the last two years are presented below:

	Year 1	Year 2
Sales	$240,000	$320,000
Cost of goods sold	150,000	200,000
Gross margin	90,000	120,000
Selling and administrative expense	80,000	90,000
Operating income	$ 10,000	$ 30,000

In Year 1, the company produced 18,000 units and sold 15,000 units of its only product; in Year 2, the company again produced 18,000 units, but sold 20,000 units. The company's variable manufacturing costs are $6 per unit, and its fixed manufacturing overhead cost is $72,000 a year. Fixed manufacturing overhead costs are applied at a rate of $4 per unit.Variable selling and administrative expenses are $2 per unit sold.

Required:

1. Compute the unit product cost for the month under absorption costing and under variable costing. (5 marks)
2. Prepare new income statements for each year the using contribution format with variable costing. (10 marks)
3. Reconcile the absorption costing and variable costing income figures for each year. (5 marks)
4. Explain why the operating income for Year 2 under variable costing was higher than the operating income under absorption costing, even though the same number of units were sold. (5 marks)

Answer rating: 100% (QA)

Lets start by computing the unit product cost for the month under absorption costing ... View the full answer