Prepare operating income statements for chenango can

Question

Chenango Can Company manufactures metal cans used in the food-processing industry. A case of cans sells for $25. The variable costs of production for one case of cans are as follows:

Direct material	$ 7.50
Direct labour	2.50
Variable manufacturing overhead	6.00
Total variable manufacturing cost per case	$16.00

Variable selling and administrative costs amount to $.50 per case. Budgeted fixed manufacturing overhead is $400,000 per year, and fixed selling and administrative cost is $37,500 per year. The following data pertain to the company's first three years of operation.

	Year 1	Year 2	Year 3
Planned production (in units)	80,000	80,000	80,000
Finished-goods inventory (in units), January 1.	0	0	20,000
Actual production (in units)	80,000	80,000	80,000
Sales (in units)	80,000	60,000	90,000
Finished-goods inventory (in units), December 31	0	20,000	10,000

There were no variances during Chenango's first three years of operation. Actual costs were the same as the budgeted costs.

Required:

1. Prepare operating income statements for Chenango Can Company for its first three years of operations using:
   1. Absorption costing
   2. Variable costing
2. Reconcile Chenango Can Company's operating income reported under absorption and variable costing for each of its first three years of operation. Use the shortcut method.
3. Suppose that during Chenango's fourth year of operation actual production equals planned production, actual costs are equal to budgeted or standard costs, and the company ends the year with no inventory on hand.
   1. What will be the difference between absorption-costing income and variable-costing income in year 4?
   2. What will be the relationship between total operating income for the four-year period as reported under absorption and variable costing? Explain.