AFN produces plastic that is used for injection molding applications such as gears for small motors. In 2002, the first year of operations, AFN produced 4,000 tons of plastic and sold 3,000 tons. In 2003, the production and sales results were exactly re- versed. In each year, selling price per ton was \($2,000\), variable manufacturing costs were 15% of the sales price of units produced, variable selling expenses were 10% of the selling price of units sold, fixed manufacturing costs were \($2,400,000\), and fixed administrative expenses were $600,000.

Instructions

(a) Prepare comparative income statements for each year using variable costing.

(b) Prepare comparative income statements for each year using absorption costing.

(c) Reconcile the differences each year in income from operations under the two cost- ing approaches.

(d) Comment on the effects of production and sales on net income under the two cost- ing approaches.