Dowell Company produces a single product. Its income statements under absorption

Question

Dowell Company produces a single product. Its income statements under absorption costing for its first two years of operation follow. Sales ($46 per unit) Cost of goods sold ($31 per unit) Gross margin Selling and administrative expenses Net income $1,012,000 $1,932,00 682,000 1,302,000 330,000 630,000 289,000329,000 S41,000 301,000 Additional Information a. Sales and production data for these first two years follow Units produced Units sold 2016 2017 32,000 32,000 22,000 42,000 b. Variable cost per unit and total fixed costs are unchanged during 2016 and 2017. The company's $31 per unit product cost consists of the following. s 4 Direct materials Direct labor Variable overhead Fixed overhead ($320,000/32,000 units) Total product cost per unit 10 $31 c. Selling and administrative expenses consist of the following.

Explanation / Answer

1 Variable costing income statement 2016 2017 Sales 1012000 1932000 Less: Variable cost of goods sold (Note:1) 462000 882000 Gross contribution margin 550000 1050000 Less:Variable selling and administrative expenses 44000 84000 Contribution margin 506000 966000 Less: Fixed expenses Overhead 320000 320000 selling and administrative expenses 245000 565000 245000 565000 Net income/(loss) -59000 401000 * Assumed to be 0 due to lack of information Note:1 Product cost under variable costing $ Direct material 4 Direct labor 8 Variable overhead 9 Total 21 2016 Units sold=22000 units Cost of goods sold=22000*21=$462000 2017 Units sold=42000 units Cost of goods sold=42000*21=$882000 2 Reconcilation of variable costing income to absorption costing income 2016 2017 Variable costing income (loss) -59000 401000 Add:Fixed manufacturing overhead deferred in inventory (Note:2) 100000 Less:Fixed manufacturing overhead released from inventory 100000 (Note:2) Absorption costing income (loss) 41000 301000 Note:2 Units produced 32000 Less: units sold 22000 Ending inventory 10000 Fixed overhead per unit=$ 10 Fixed manufacturing overhead deferred in ending inventory=10000*10=100000 This will have a reverse effect in 2017. I appreciate your ratings

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