Amanjeet Chinmayi left her job as the production manager of a medium-sized firm two years ago to join a new firm that was manufacturing a revolutionary type of fitness equipment. Amanjeet was made the general manager at the start of operations, and the firm seemed to be doing extremely well. The president was extremely pleased with the company's first-year performance and, at the beginning of the second year, promised Amanjeet a $20,000 bonus if the company's net income were to increase by 25% in year 2.

During year 2, Amanjeet sold 25% more units than she had in year 1 and was so confident that she would receive her bonus that she bought non-refundable airline tickets to Europe for her husband Leo, her three sons, and herself.

At the end of year 2, Amanjeet received the income statement, and it showed that the company's income had decreased from year 1 even though it had sold considerably more units. Amanjeet did not get along very well with the accountant and felt that he had deliberately distorted the financial statements for year 2.

Amanjeet received the following reports:

Instructions
(a) Prepare variable-costing income statements for years 1 and 2.
(b) For years 1 and 2, reconcile the differences between the net income as determined by the income statements you have prepared in part (a) and the income statements prepared by the accountant.
(c) Explain to Amanjeet why she lost her $20,000 bonus. Which income statement more accurately measures performance? Why?

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Year 1 Year 2 Production (in units) Sales (in units) Unit selling price Unit costs 6,000 4,000 500 3,000 5,000 $500 Variable manufacturing Variable selling Fixed manufacturing Fixed selling 300 20 180,000 100,000 $ 300 20 210,000 140,000 Income Statement-(FIFO) Sales Cost of goods sold Gross margin Selling expenses Net income $2,000,000 1,320,000 680,000 180,000 $500,000 $2,500,000 1,770,000 730,000 240,000 $490,000