Feeling Fab Ltd produces frozen yoghurt. a low-fat dairy dessert. The product is sold in five-litre containers and had the following price and variable costs per unit for the current year which ended on 30 June:

Sales price...............................$15.00

Direct material.............................5.00

Direct labour...............................2.00

Variable overhead.........................3.00

Budgeted fixed overhead for the current year was $300 000, which was equal to actual fixed overhead. Actual production was 150 000 five-litre containers, which was equal to the budgeted level of production, but only 125 000 containers were sold. Feeling Fab incurred the following selling and administrative expenses:

Fixed..........................................$50,000

Variable........................$1 per container sold

Required:

1. Calculate the cost per unit under variable and absorption costing.

2. Prepare income statements for the current year using:

(a) Absorption costing.

(b) Variable costing.

3. Reconcile the profit reported under the two methods by listing the two key areas where the statements differ.