AFN Company produces plastic that is used for injection-moulding applications such as gears for small motors. In 2016, the first year of operations, AFN Company produced 4,000 tonnes of plastic and sold 3,500 tonnes. In 2017, the production and sales results were exactly reversed. In each year, the selling price per tonne was $2,000; variable manufacturing costs were 15% of the sales price for the units produced; variable selling expenses were 10% of the selling price of the units sold; fixed manufacturing costs were $2.8 million; and fixed administrative expenses were $500,000.

Instructions

(a) Prepare comparative income statements for each year using variable costing. (Use the format from Illustration 8-5.)

(b) Prepare comparative income statements for each year using absorption costing. (Use the format from Illustration 8-4.)

(c) Reconcile the differences in the income from operations each year under the two costing approaches.

(d) Comment on the effects that the production and sales levels have on net income under the two costing approaches.