LUX produces fabrics that are used for clothing and other applications. In 2011, the first year of operations, LUX produced 500,000 yards of fabric and sold 400,000 yards.

In 2012, the production and sales results were exactly reversed. In each year, selling price per yard was $2, variable manufacturing costs were 25% of the sales price of units produced, variable selling expenses were 10% of the selling price of units sold, fixed manufacturing costs were $300,000, and fixed administrative expenses were $100,000.

Instructions

(a) Prepare income statements for each year using variable costing.

(b) Prepare income statements for each year using absorption costing.

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

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