Required:

Compute the unit product cost in each year under:

a$)$ Absorption costing $($Show how much of this cost is variable and how much is fixed$)$

b$)$ Variable costing

Prepare a contribution format variable costing income statement for each year.

Refer to the absorption costing income statements, reconcile the variable costing and absorption costing net operating incomes for each year.

Refer again to the absorption costing income statements, explain why net operating income was higher in Year $2$ than it was in Year $1$ under the absorption approach, in light of the fact that fewer units were sold in Year $2$ than in Year $1.$

Refer again to the absorption costing income statements, explain why the company suffered a loss in Year $3$ but reported a profit in Year $1,$ although the same number of units was sold in each year.

Assume that the company must obtain additional financing. As a member of top management, which of the income statements above would you prefer to take with you to negotiate with the creditor? Why?

Note: You can use. Microsoft Excel sofware to prepare income statement and other calculations.