Preparing an income statement using absorption and direct costing. The McKay Company manufactures one product. The company uses standard costing. During the year 19X2, the normal volume of 10,000 units was produced, and 7,500 units were sold for $198 each. Assume that there was no beginning inventory on January 1, 19X2. The following data are provided for the year 19X2:

Instructions 1. Prepare an income statement for the year 19X2 using absorption costing.
2. Prepare an income statement for the year 19X2 using direct costing.
3. Prepare a reconciliation of the net income under direct costing and absorption costing.

Materials ($39 per unit) Labor ($49 per unit) Manufacturing Overhead Fixed Costs Budgeted Costs Incurred $390,000 $390,000 490,000 490,000 $500,000 $500,000 Variable ($9 per unit) 90,000 590,000 90,000 590,000 Rate per unit ($590,000 + 10,000 units) 59 Selling and Administrative Expenses Fixed $198,000 $198,000 Variable ($12.50 per unit sold) 125,000 323,000 93,750 291,750