38. Absorption Costing Versus Variable Costing. Time Keeper, Inc., produces wrist watches. The company has no finished goods inventory at the beginning of year 1. The following information pertains to Time Keeper, Inc. 50,000 units $40 per unit Annual production Sales price Variable production cost per unit Direct materials Direct labor Manufacturing overhead Fixed production costs $10 3 12 $25 per unit $150,000 each year; $3 per unit at 50,000 units of production Variable selling and administrative cost Fixed selling and administrative cost $1 per unit $100,000 each year Required: a. All 50,000 units produced during year 1 are sold during year 1. 1. Prepare a traditional income statement assuming the company uses absorption costing. 2. Prepare a contribution margin income statement assuming the company uses variable costing. b. Although 50,000 units are produced during year 2, only 40,000 are sold during the year. The remaining 10,000 units are in finished goods inventory at the end of year 2. 1. Prepare a traditional income statement assuming the company uses absorption costing. 2. Prepare a contribution margin income statement assuming the company uses variable costing. a.' (1) Traditional income statement (absorption costing), year 1: Sales Cost of goods sold Gross margin Selling and administrative costs Operating profit (2) Contribution margin income statement (variable costing), year 1: Sales Variable costs Cost of goods sold Selling and administration Total variable costs Contribution margin Fixed costs Cost of goods sold Selling and administration Total fixed costs Operating profit $ 450,000 b.' (1) Traditional income statement (absorption costing), year 2: Sales Cost of goods sold Gross margin Selling and administrative costs Operating profit S 340.000 (2) Contribution margin income statement (variable costing), year 2: Sales Variable costs Cost of goods sold Selling and administration Total variable costs Contribution margin Fixed costs Cost of goods sold Selling and administration Total fixed costs Operating profit