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

Santiago produced 20,000 rmits in the first year and sold 15,000. In the second year, it produced 15,000 units and sold 20,000 units. The selling price per unit each year was $20.
Santiago uses an actual cost system for product costing.
Required:
1. Prepare income statements for both years using absorption costing. Has firm perfor¬
mance, 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?

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Variable cost per unit: Direct materials Direct labor Variable overhead Fixed costs per year: Overhead Selling and administrative $5 4 3 $90,000 20,000