HOLOLOLA Company manufactures and sells a single product. The following costs were incurred during the companys first year of operations:

Variable costs per unit:
Manufacturing:
Direct materials	$35
Direct labour	22
Variable manufacturing overhead	5
Variable selling and administrative	6
Fixed costs per year:
Fixed manufacturing overhead	247,000
Fixed selling and administrative expense	130,000

During the year, the company produced 26,000 units and sold 25,000 units. The selling price of the companys product is $91 per unit.

Required:

1. Assume that the company uses absorption costing.

1. Compute the unit product cost. (3 marks)

2. Prepare an income statement for the year. (7 marks)

Absorption Costing Income Statement
Sales
Cost of goods sold:
Beginning inventory
Add: Cost of goods manufactured
Goods available for sale
Less: Ending inventory
Gross margin
Selling and administrative expenses
Operating income

2.Assume that the company uses variable costing.

1. Compute the unit product cost. (2 marks)

2. Prepare an income statement for the year.(8 marks)

Variable Costing Income Statement
Sales
Variable expenses:
Variable cost of goods sold:
Beginning inventory
Add: Variable manufacturing costs
Goods available for sale
Less: Ending inventory
Variable cost of goods sold
Variable selling expense
Contribution margin
Fixed expenses:
Fixed manufacturing overhead
Fixed selling and administrative
Operating income

2. Reconcile the difference in income and explain what the main cause for it is. (5 marks)