2. Chataqua Can Company manufactures metal cans used in the food-processing industry. A case of cans sells for $50. The variable costs of production for one case of cans are as follows:

Variable selling and administrative costs amount to $1 per case. Budgeted fixed manufacturing overhead is $800,000 per year, and fixed selling and administrative cost is $75,000 per year. The following data pertain to the companys first three years of operation.

Actual costs were the same as the budgeted costs.

PER-UNIT

Direct Labor	5
Variable manufacturing overhead	12
Total variable manufacturing overhead	32

	Year 1	Year 2	Year 3
Planned Production Units	80000	80000	80000
Finished goods inventory units-January 1st	0	0	20000
Actual Production in units	80000	80000	80000
Sales unites	80000	60000	90000
Finished Goods inventory in units-December 31		20000	10000

Required:

1.

Prepare operating income statements for Chataqua Can Company for its first three years of operations using:

a.		Absorption costing.
b.		Variable costing.

2.

Reconcile Chataqua Can Company's operating income reported under absorption and variable costing for each of its first three years of operation. Use the shortcut method.

3.

Suppose that during Chataqua's fourth year of operation actual production equals planned production, actual costs are equal to budgeted or standard costs, and the company ends the year with no inventory on hand.

a.		What will be the difference between absorption-costing income and variable-costing income in year 4?
b.		What will be the relationship between total operating income for the four-year period as reported under absorption and variable costing? Explain.