This makes no sense at all,' said Bill Sharp, managing director of Essex Company. 'We sold the same number of units this year as we did last year, yet our profits have more than doubled. Who made the goof - the computer or the people who operate it?' The statements to which Mr Sharp was referring are shown below (absorption costing basis):

	Year 1		Year 2
Sales (20,000 units each year)		1,300,000		1,300,000
Less cost of goods sold		910,000		790,000
Gross margin		390,000		510,000
Less selling and administrative expenses		200,000		200,000
Profit		190,000		310,000

The statements above show the results of the first two years of operation. In the first year, the company produced and sold 20,000 units; in the second year, the company again sold 20,000 units, but it increased production in order to have a inventory of units on hand, as shown below:

	Year 1		Year 2
Production in units		20,000		25,000
Sales in units		20,000		20,000
Variable production cost per unit		16		16
Fixed manufacturing overhead costs (total)		600,000		25,000

Essex Company produces a single product; fixed manufacturing overhead costs are applied to the product on the basis of each year's production. (Thus, a new fixed manufacturing overhead rate is computed each year.) Variable selling and administrative expenses are 1 per unit sold.

Required:
1.	Compute the unit product cost for each year under absorption costing and variable costing. (Round your answers to 2 decimal places.)

2.	Prepare a statement of profit and loss for each year, using the contribution approach with variable costing. (Enter all answers as a positive values except losses which should be indicated with a minus sign.)

3.	Reconcile the variable costing and absorption costing profit figures for each year.

4.	Under absorption costing, the profit for Year 2 was higher than the profit for Year 1 possibly because of good cost control by management.
	multiple choice 1 True False

5.	(a)	Operations would not have differed in Year 2 if the company had been using JIT inventory methods.
		multiple choice 2 True False
	(b)	Under absorption costing, if JIT has been in use during Year 2, the company's profit in Year 2 would have been:
		multiple choice 3 lower than what has been reported. higher than what has been reported. the same as what has been reported. unknown.