50. Absorption Costing Versus Variable Costing. Prime, Inc., produces tricycles. The company has no finished goods inventory at the beginning of year 1. The following information pertains to Prime, Inc.: 60,000 units $80 per unit Annual production Sales price Variable production cost per unit Direct materials Direct labor Manufacturing overhead Fixed production costs S12 8 $30 per unit 10 $240,000 each year: $4 per unit at 60,000 units of production Variable selling and administrative cost $2 per unit Fixed selling and administrative cost $80,000 each year Required: a. All 60,000 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 60,000 units are produced during year 2, only 40,000 are sold during the year. The remaining 20,000 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 (2) Contribution margin income statement (variable costing), year 1 $ 4,800,000 Correct $2.040.000 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 Incorrect Incorrect Incorrect Correct 1.200.000 $ 2.880.000 Incorrect Incorrect Incorrect Incorrect b. (1) Traditional income statement (absorption costing). year 2: Sales S 4.800.000 Cost of goods sold 1.360,000 Gross margin S 3.440.000 Selling and administrative costs 160.000 Operating profit $ 3.440,000 Incorrect Correct Incorrect Correct Incorrect Correct (2) Contribution margin income statement (variable costing), year 2: Sales S 3.200.000 Variable costs Cost of goods sold $1,560,000 Selling and administration Total variable costs Contribution margin Fixed costs Cost of goods sold Selling and administration Total fixed costs Operating profit Incorrect Incorrect Incorrect Incorrect Incorrect Incorrect Incorrect Incorrect A E 50 +