Whitman Company has just completed its first year of operations. The company's absorption costing income statement for the years below:
- Sales (35,000 units X $25 per unit)$875,000
- Cost of Goods Sold (35,000 units x $16 per unit)$560,000
- Gross margin$315,000
- Selling and administrative expenses$280,000
- Net Operating Income$35,000
The company's selling and administrative expenses consist of $210,000 per year in fixed expenses and $2 per unit sold in variable expenses. The $16 per unit product cost given above is computed as follows:
- Direct Materials$5
- Direct Labor6
- Variable manufacturing overhead 1
- Fixed manufacturing overhead ($160,000 / 40,000 units)4
- Absorption costing unit product cost$16
1. Redo the company's income statement in the contribution format using variable costing.
2. Reconcile any difference between the net operating income on your variable costing income statement and the net operating income on the absorption costing income statement above.