Skilz Company had the following operating data for its first two years of operations:

Variable costs per unit:

Direct materials .........$ 5.00

Direct labor ............3.00

Variable overhead .......1.50

Fixed costs per year:

Overhead ...........90,000

Selling and administrative ...17,200

Skilz produced 30,000 units in the first year and sold 25,000. In the second year, it produced 25,000 units and sold 30,000 units. The selling price per unit each year was $15. Skilz uses an actual costing system for product costing.

Required:

1. Prepare income statements for both years using absorption costing. Has firm performance, as measured by income, improved or declined from Year 1 to Year 2?

2. Prepare income statements for both years using variable costing. Has firm performance, as measured by income, improved or declined from Year 1 to Year 2?

3. Which method do you think most accurately measures firm performance? Why?