Question

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Dowell Company produces a single product. Its income statements under absorption costing for its first two years of operation follow.

		2018			2019
Sales ($44 per unit)	$	1,012,000		$	1,892,000
Cost of goods sold ($29 per unit)		667,000			1,247,000
Gross margin		345,000			645,000
Selling and administrative expenses		291,750			336,750
Net income	$	53,250		$	308,250

Additional Information

1. Sales and production data for these first two years follow.

	2018		2019
Units produced	33,000		33,000
Units sold	23,000		43,000

2. Variable cost per unit and total fixed costs are unchanged during 2018 and 2019. The company's $29 per unit product cost consists of the following.

Direct materials	$	4
Direct labor		8
Variable overhead		7
Fixed overhead ($330,000/33,000 units)		10
Total product cost per unit	$	29

3. Selling and administrative expenses consist of the following.

		2018			2019
Variable selling and administrative expenses ($2.25 per unit)	$	51,750		$	96,750
Fixed selling and administrative expenses		240,000			240,000
Total selling and administrative expenses	$	291,750		$	336,750

1. Prepare income statements for the company for each of its first two years under variable costing. (Loss amounts should be entered with a minus sign.)

	DOWELL Company Variable Costing Income Statements 2018 2019 Net income (loss)

2. Prepare a table as in Exhibit 6.12 to convert variable costing income to absorption costing income for both 2018 and 2019. (Loss amounts should be entered with a minus sign.)

	DOWELL COMPANY Reconciliation of Variable Costing Income to Absorption Costing Income 2018 2019 Variable costing income (loss) Absorption costing income (loss)

Answer 1