P6-18 During Denton Company ’s first two years of operations, the company reported absorption

During Denton Company ’s first two years of operations, the company reported absorption costing net operating income as follows

P6-18 Variable Costing Income Statement; Reconciliation [LO2, LO3]

P6-18 During Denton Company ’s first two years of operations, the company reported absorption costing net operating income as follows:

Year 1 Year 2

Sales (@ $50 per unit) . . . . . . . . . . . . . . . . . . . . $1,000,000 $1,500,000

Cost of goods sold (@ $34 per unit) . . . . . . . . . . 680,000 1,020,000

Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . 320,000 480,000

Selling and administrative expenses*. . . . . . . . . 310,000 340,000

Net operating income . . . . . . . . . . . . . . . . . . . . . $ 10,000 $ 140,000

* $3 per unit variable; $250,000 fi xed each year.

The company’s $34 unit product cost is computed as follows:

Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Variable manufacturing overhead . . . . . . . . . . . . . . . . . . . . . . . . . 2

Fixed manufacturing overhead ($350,000 ÷ 25,000 units) . . . . . 14

Absorption costing unit product cost . . . . . . . . . . . . . . . . . . . . . . $34

Production and cost data for the two years are given below:

Year 1 Year 2

Units produced . . . . . . . . . 25,000 25,000
Units sold . . . . . . . . . . . . . 20,000 30,000

Required:

1. Prepare a variable costing contribution format income statement for each year.
2. Reconcile the absorption costing and variable costing net operating income figures for each year.

TUTORIAL PREVIEW

DENTON COMPANY Variable Costing Income Statement
	Year 1	Year 2
Unit Sales	20,000	30,000
Sales	$1,000,000	$1,500,000

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