Portland Optics, Inc., specializes in manufacturing lenses for large telescope cameras used in space exploration. Since the specifications for the lenses are determined by the customer and vary considerably, the company uses a job-order costing system. It applies factory overhead to jobs based on direct labour hours using the absorption (full) costing method. Portland's predetermined overhead rates for 2015 and 2016 were based on the following estimates:

Marie-Michelle David, Portland's controller, would like to use variable costing for internal reporting since she believes statements prepared using variable costing are more appropriate for making product decisions. In order to explain the benefits of variable costing to the other members of Portland's management team, Marie-Michelle plans to convert the company's income statement from absorption costing to variable costing. She has gathered the following information, along with a copy of Portland's comparative income statement for the years 2015 and 2016.

Portland's actual manufacturing data for the two years are as follows:

The company's actual inventory balances were as follows:

For both years, all administrative costs were fixed. A portion of the selling expenses was variable as it resulted from an 8% commission paid on net sales. Portland reports any over- or underapplied overhead as an adjustment to cost of goods sold.
Instructions
(a) For the year ended December 31, 2016, prepare the revised income statement for Portland Optics, Inc., using the variable-costing method. Be sure to include the contribution margin on the revised income statement.
(b) Describe two advantages of using variable costing rather than absorption costing.

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2015 2016 Direct labour hours Direct labour cost Fixed factory overhead Variable factory overhead 32,500 44,000 $325,000 $130,000 $162,500 $462,000 $176,000 $198,000 PORTLAND OPTICS, INC. Comparative Income Statement Years 2015-2016 2015 2016 Net sales Cost of goods sold Finished goods, January 1 Cost of goods manufactured Total available Finished goods, December 31 Cost of goods sold before overhead adjustment $1,140,000 $1,520,000 16,000 720,000 736,000 25,000 711,000 12,000 723,000 417,000 150,000 160,000 310,000 $ 107,000 25,000 976,000 1,001,000 14,000 987,000 7,000 994,000 526,000 190,000 187,000 377,000 $ 149,000 Overhead adjustment Cost of goods sold Gross profit Selling expenses Administrative expenses Total operating expenses Operating income 2015 2016 Direct labour hours Direct labour cost Raw materials used Fixed factory overhead 30,000 42,000 $300,000 $140,000 $132,000 $435,000 $210,000 $175,000 Dec. 31, 2014 Dec. 31, 2015 Dec. 31, 2016 $18,000 Raw material Work in process $32,000 $36,000 Costs Direct labour hours $44,000 1,800 $34,000 1,400 S60,000 2,500 Finished goods Costs Direct labour hours $16,000 700 $25,000 1,080 $14,000 550