Hanlon Manufacturing manufactures a single product that it will sell for $84 per unit. The company is looking to project its operating income for its first two years of operations. Cost information for the single unit of its product is as follows:

	Direct material per unit produced $32
	Direct labor cost per unit produced $17
	Variable manufacturing overhead (MOH) per unit produced $8
	Variable operating expenses per unit sold $4
	Fixed manufacturing overhead (MOH) for each year is $288,000, while fixed operating expenses for each year will be $84,000.

During its first year of operations, the company plans to manufacture 24,000 units and anticipates selling 21,000 of those units. During the second year of itsoperations, the company plans to manufacture 24,000 units and anticipates selling 26,000 units (it has units in beginning inventory for the second year from its first year of operations).

Requirement 1. Prepare an absorption costing income statement for (a) the first year of operations and (b) the second year of operations.

Hanlon Manufacturing

Income Statement (Absorption Costing)

		(a) Year 1
Less:
Less:

(b) Year 2

Requirement 2. Before you prepare the variable costing income statements for

HanlonHanlon,

predict the company's operating income using variable costing for both its first year and its second year without preparing the variable costing income statements. Hint: Calculate the variable costing operating income for a given year by taking that year's absorption costing operating income and adding or subtracting the difference in operating income as calculated using the following formula: Difference in operating income = (Change in inventory level in units x Fixed MOH per unit).

Begin by calculating the difference in income each year using the formula provided.

	Change in inventory		Fixed MOH		Difference in
Year	level in units	x	per unit	=	operating income
1		x		=
2		x		=

Now predict

HanlonHanlon's

operating income under variable costing for both its first year and its second year of operations.

	Operating income
Year	under variable costing
1
2

Requirement 3. Prepare a variable costing income statement for (a) the first year of operations and (b) the second year of operations.

Hanlon Manufacturing

Contribution Margin Income Statement (Variable Costing)

				(a) Year 1	(b) Year 2
	Less:
	Less: