Required information [The following information applies to the questions display

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Required information [The following information applies to the questions displayed belowJ Dowell Company produces a single product. Its income statements under absorption costing for its first two years of operation follow 2016 2017 Sales ($46 per unit) Cost of goods sold ($31 per unit) Gross margin Selling and administrative expenses Net income $1,150,000 $2,070,000 775,000 1,395,000 675,000 346,250 $ 73,750 $ 328,750 375,000 301,250 Additional Information a. Sales and production data for these first two years follow 2016 2017 Units produced Units sold 25,000 45,000 35,000 35,000 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 Direct materials Direct labor Variable overhead Fixed overhead (S350, 000/35,00010 units) Total product cost per unit $31 c. Selling and administrative expenses consist of the following 2016 2017 Variable selling and administrative expenses ($2.25 per unit) Fixed selling and administrative expenses Total selling and administrative expenses $ 56,250 $101,250 245,000 245,000 $301,250 $346,250

Explanation / Answer

2) First of all we need to calculate the variable costing income(loss) for 2016 and 2017 which is calculated as follows:-

2016 Variable costing Income/(loss) = [Units sold*(Sale Price - Total Variable cost)] - Total Fixed cost

= [25,000*($46-5-$8-$8-$2.25)] - ($350,000+$245,000)

= (25,000*$22.75) - $595,000

= $568,750 - $595,000 = ($26,250) loss

2017 Variable costing Income/(loss) = [Units sold*(Sale Price - Total Variable cost)] - Total Fixed cost

= (45,000*$22.75) - $595,000

= $1,023,750 - $595,000 = $428,750

Difference in variable costing income and absorption costing income is due to fixed manufacturing cost is included in opening and closing inventory in absorption costing income statement.

Fixed manuf. OH in 2016 ending inventory = (35,000 units produced - 25,000 units sold)*Fixed manuf. OH per

= 10,000 units*$10 = $100,000

Fixed manuf. OH in 2017 beginning inventory = $100,000

Dowell Company

Reconciliation of variable costing income to absorption costing income (Amts in $)

Particulars 2016 2017 Variable costing income/(loss) (26,250) 428,750 Add: Fixed manufaturing overhead in ending inventory 100,000 0 Less: Fixed manufaturing overhead in beginning inventory 0 (100,000) Absorption Costing income/(Loss) 73,750 328,750

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