Question

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

Sales ($46 per unit) $ 966,000 $ 1,886,000
Cost of goods sold ($31 per unit) 651,000 1,271,000
Gross margin 315,000 615,000
Selling and administrative expenses 287,000 327,000
Net income $ 28,000 $ 288,000
Additional Information
1. Sales and production data for these first two years follow.
2016 2017
Units produced 31,000 31,000
Units sold 21,000 41,000
2. 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 $ 4
Direct labor 8
Variable overhead 9
Fixed overhead ($310,000/31,000 units) 10
Total product cost per unit $ 31
3. Selling and administrative expenses consist of the following.
2016 2017
Variable selling and administrative expenses ($2 per unit) $ 42,000 $ 82,000
Fixed selling and administrative expenses 240,000 240,000
Total selling and administrative expenses $ 282,000 $ 322,000
Complete income statements for the company for each of its first two years under variable costing. (Loss amounts should be entered with a minus sign.)

Answer 1

2016 = -$67,000

2017 = $393,000

Step-by-step explanation:

The income statements for company for each of its first two years under variable costing is shown below:-

Dowell Company

Income statement

Variable costing

Particulars 2016 2017

Sales $966,000 $1,886,000

Less: Variable cost

Direct material $84,000 $164,000

(21,000 × $4) (41,000 × $4)

Direct labor $168,000 $328,000

(21,000 × $8) (41,000 × $8)

Variable overhead $189,000 $369,000

(21,000 × $9) (41,000 × $9)

Variable selling and

administrative expenses $42,000 $82,000

(21,000 × $2) (41,000 × $2)

Total variable cost $483,000 $943,000

Contribution margin $483,000 $943,000

(Sales - Contribution margin)

Less:

Fixed expenses

Fixed overhead $310,000 $310,000

Fixed selling and

administrative expenses $240,000 $240,000

Total of fixed expenses $550,000 $550,000

Net income (loss) -$67,000 $393,000

To determine the net income (loss) we simply deduct the contribution margin from total of fixed assets.