1. Prepare operating income statements for both years based on absorption costing.

[The following information applies to the questions displayed below.] Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $23 per unit. Lehighton uses an actual costing system, which means that the actual costs of direct material, direct labor, and manufacturing overhead are entered into work-in-process inventory. The actual application rate for manufacturing overhead is computed each year; actual manufacturing overhead is divided by actual production (in units) to compute the application rate. Information for Lehighton's first two years of operation is as follows: Year 1 Year 2 3,2003 ,200 3,600 2,800 Sales (in units) Production (in units) Production costs: Variable manufacturing costs Fixed manufacturing overhead Selling and administrative costs: Variable Fixed $16,200 19,800 $12,600 19,800 12,800 11,800 12,800 11,800 Selected information from Lehighton's year-end balance sheets for its first two years of operation is as follows: LEHIGHTON CHALK COMPANY Selected Balance Sheet Information Based on absorption costing End of Year 1 Finished-goods inventory $ 4,000 Retained earnings 11,500 End of Year 2 $ 0 21,400 Based on variable costing Finished-goods inventory Retained earnings End of Year 1 $ 1,800 9,300 End of Year 2 $ 0 21,400 LEHIGHTON CHALK COMPANY Income Statement Year 1 Year 2 0 $ Sales revenue Cost of goods sold: Beginning finished-goods inventory Cost of goods manufactured Cost of goods available for sale Ending finished-goods inventory Cost of goods sold Gross margin Selling and administrative expenses Operating income $ 0 $ 0 $