EXERCISE 5A–5 Variable Costing Income Statement; Reconciliation [ LO6 , LO7 ]

Whitman Company has just completed its first year of operations. The company’s absorption costing income statement for the year follows:

Whitman Company Income Statement Sales (35,000 units $25 per unit) .................................... $875,000 Cost of goods sold (35,000 units $16 per unit) ............... 560,000 Gross margin ...................................................................... 315,000 Selling and administrative expenses .................................. 280,000 Net operating income ......................................................... $ 35,000 The company’s selling and administrative expenses consist of $210,000 per year in fixed expenses and $2 per unit sold in variable expenses. The $16 per unit product cost given above is computed as follows:
Direct materials ............................................................................ $ 5 Direct labor .................................................................................. 6 Variable manufacturing overhead ................................................ 1 Fixed manufacturing overhead ($160,000 40,000 units) ......... 4 Absorption costing unit product cost ............................................ $16 Required:
1. Redo the company’s income statement in the contribution format using variable costing.
2. Reconcile any difference between the net operating income on your variable costing income statement and the net operating income on the absorption costing income statement above.