Can someone explain to me whats wrong with these statements? asked Cheri Reynolds, president of Milex Corporation. They just dont make sense. We sold the same number of units this year as we did last year, yet our pro ts have tripled! Who messed up the calculations? The absorption costing income statements to which Ms. Reynolds was referring are shown below:

Year 1 Year 2

Sales (40,000 units each year) . . . . . . . . . . . . . . $1,250,000 $1,250,000

Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . 840,000 720,000

Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . 410,000 530,000

Selling and administrative expenses . . . . . . . . . . 350,000 350,000

Net operating income. . . . . . . . . . . . . . . . . . . . . . $ 60,000 $ 180,000

In the rst year, the company produced and sold 40,000 units; in the second year, the company again sold 40,000 units, but it increased production to 50,000 units, as shown below:

Year 1 Year 2

Production in units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 50,000

Sales in units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 40,000

Variable manufacturing cost per unit produced . . . . . . . . . . . . . . . . $6 $6

Variable selling and administrative expense per unit sold . . . . . . . . $2 $2

Fixed manufacturing overhead costs (total) . . . . . . . . . . . . . . . . . . . $600,000 $600,000

Milex Corporation applies xed manufacturing overhead costs to its only product on the basis of each years production.

Required:

1. Compute the unit product cost for each year under:

a. Absorption costing. b. Variable costing.

2. Prepare a contribution format income statement for each year using variable costing.