(Convert variable to absorption) Salado Corp. produces small outdoor sheds. The company began operations in 2006, produced 1,750 sheds and sold 1,500. A variable costing income statement for 2006 follows. During the year, variable production costs per unit were $800 for direct material, $300 for direct labor, and $200 for overhead

The company president is upset about the net loss because he wanted to borrow funds to expand capacity.

a. Prepare an absorption costing pre-tax income statement.

b. Explain the source of the difference between the net income and the net loss figures under the two costing systems.

c. Would it be appropriate to present an absorption costing income state- ment to the local banker considering the company president's knowl- edge of the net loss determined under variable costing? Explain.

d. Assume that during the second year of operations, Salado produced 1,750 sheds, sold 1,850, and experienced the same total fixed costs as in 2006. For the second year: 1. Prepare a variable costing pre-tax income statement. 2. Prepare an absorption costing pre-tax income statement. 3. Explain the difference between the incomes for the second year un- der the two systems.LO1.

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Sales SALADO CORP. Income Statement (Variable Costing) For the Year Ended December 31, 2006 Variable cost of goods sold Beginning inventory Cost of goods manufactured Cost of goods available for sale Less ending inventory Product contribution margin Less variable selling and administrative expenses Total contribution margin Less fixed expenses Fixed factory overhead Fixed selling and administrative expenses Income before taxes $3,750,000 $ 0 2,275,000 $2,275,000 (325,000) (1,950,000) $1,800,000 (270,000) $1,530,000 $1,505,000 190,000 (1,695,000) $ (165,000)