Calculate product cost, prepare income statements under variable costing and absorption costing, and reconcile the difference when sales and production levels change. Amanjeet Chinmayi left her job as the production manager of a medium-sized firm two years ago to join a new firm that was manufacturing a revolutionary type of fitness equipment. Amanjeet was made the general manager at the start of operations, and the firm seemed to be doing extremely well. The president was extremely pleased with the company's first-year performance and, at the beginning of the second year, promised Amanjeet a $20,000 bonus if the company's net income were to increase by 25% in year 2. During year 2, Amanjeet sold 25% more units than she had in year 1 and was so confident that she would receive her bonus that she bought non-refundable airline tickets to Europe for her husband Leo, her three sons, and herself. At the end of year 2, Amanjeet received the income statement, and it showed that the company's income had decreased from year 1 even though it had sold considerably more units. Amanjeet did not get along very well with the accountant and felt that he had deliberately distorted the financial statements for year 2. Amanjeet received the following reports: Year 1 Year 2 Production (in units) 6,000 3,000 Sales (in units) 4,000 5,000 Unit selling price $500 $500 Unit costs Variable manufacturing $300 $300 Variable selling 20 20 Fixed manufacturing 180,000 210,000 Fixed selling 100,000 140,000 Income Statement(FIFO) Sales $2,000,000 $2,500,000 Cost of goods sold 1,320,000 1,770,000 Gross margin 680,000 730,000 Selling expenses 180,000 240,000 Net income $500,000 $490,000 Instructions (a) Prepare variable-costing income statements for years 1 and 2. Year 1 NI: $440,000; Year 2 NI: $550,000 (b) For years 1 and 2, reconcile the differences between the net income as determined by the income statements you have prepared in part (a) and the income statements prepared by the accountant. (c) Explain to Amanjeet why she lost her $20,000 bonus. Which income statement more accurately measures performance? Why? (adapted from CGA Canada, now CPA Canada)