Incomplete Records: On December 31 of last year, a fire destroyed the bulk of the accounting records of Malox Company, a small, one-product manufacturing firm. In addition, the chief accountant mysteriously disappeared. You have the task of reconstructing the re- cords for last year. The general manager has said that the accountant had been experimenting with both full-absorption costing and variable costing on a actual costing basis. The records are a mess, but you have gathered the following data for last year:

The company had no beginning or ending work in process inventories. You also learn that full-absorption costs per unit in last year's beginning finished goods inventory is the same as the full-absorption cost per unit for units produced during last year.

Required:

a. Prepare a comparative income statement on a full-absorption and variable costing basis.

b. At a meeting with the board of directors, the following questions were raised.

(1) "How many units did we sell last year?"

(2) "How many units did we produce last year?"

(3) "What were the unit production costs last year under both full-absorption and variable costing?" How would you respond?

c. Reconcile the operating profit under variable costing with that under full costing, showing the exact source of the difference.

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1. Sales $450,000 2. Actual fixed manufacturing costs incurred 66,000 3. Actual variable manufacturing costs per unit for last year and for units in beginning finished goods inventory on January 1 of last year 4. Operating profit, full-absorption costing basis 3 60,000 5. Notes receivable from chief accountant 6. Contribution margin 7. Direct material purchases 8. Actual marketing and administrative costs (all fixed) 9. Gross margin 14,000 180,000 175,000 21,000 81,000