(AlCPA) Absorption and direct costing income statements Flear Company has a maxi- mum productive capacity of 210,000 units per year. Normal capacity is 180,000 units per year. Standard variable manufacturing costs are $11 per unit. Fixed factory overhead is $360,000 per year. Variable selling expenses are $3 per unit and fixed selling expenses are $252,000 per year. The unit sales price is $20.

The operating results for the year are: sales, 150,000 units; production, 160,000 units; begin- ning inventory, 10,000 units; and net unfavorable variance for standard variable manufacturing costs, $40,000. All variances are written off as additions to or deductions from standard cost of goods sold.

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REQUIRED a. Prepare formal income statements for the year using: 1. Absorption costing. 2. Variable costing. b. Briefly describe the reasons for the difference in net income between the two income state- ments.