Chenango Can Company manufactures metal cans used in the food-processing industry. A case of cans sells for $35. The variable costs of production for one case of cans are as follows:

Direct material	$	9.50
Direct labor		3.50
Variable manufacturing overhead		9.00
Total variable manufacturing cost per case	$	22.00

Variable selling and administrative costs amount to $.90 per case. Budgeted fixed manufacturing overhead is $546,000 per year, and fixed selling and administrative cost is $39,500 per year. The following data pertain to the companys first three years of operation. (A unit refers to one case of cans.)

	Year 1		Year 2		Year 3
Planned production (in units)	78,000		78,000		78,000
Finished-goods inventory (in units), January 1	0		0		22,000
Actual production (in units)	78,000		78,000		78,000
Sales (in units)	78,000		56,000		89,000
Finished-goods inventory (in units), December 31	0		22,000		11,000

Actual costs were the same as the budgeted costs.

a. Absorption costing: Answer is complete but not entirely correct. ar Sales revenue Less: Cost of goods sold Gross margin Selling and Administrative Expenses s 2,730,000 1,960,000s 3,115,000 2,262,000,778,000 2,504,000 611,000 S 468,000 182,000 Variable selling and administrative els 70.200C s 50,400S 80,100 Fixed selling and administrative s 39,500 358,300 39,539,500 491,400 Operating income 92,100 b. Variable costing: Answer is complete and correct. Year 1 Year 2 Year 3 s 2,730,000s 1,960,000 3,115,000 Sales revenue Variable expenses Variable manufacturing costs 1,716,000 1,232,000 1,958,000 Variable selling and administrative costs0,20050,40080,100 Contribution margin Fixed expenses 943,800 677,600 1,076,900 546,000. 546,000 546,000 Fixed manufacturing overhead Fixed selling and administrative expenes39,539,50039,500 Operating income 358,300 92,100 491,400 2. Reconcile Chenango Can Company's operating income reported under absorption and variable costing for each of its first three years of operation. Use the shortcut method. Answer is complete but not entirely correct. Change in inventory (in units) Difference in fixed overhead - expensed under absorption and fixed overheacd rate variable 22,000 11,000 10 220,000 10 110,000