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Morey Company has just completed its first year of operations. The companys absorption costing income statement for the year appears below: MOREY COMPANY Income Statement

Morey Company has just completed its first year of operations. The companys absorption costing income statement for the year appears below:

MOREY COMPANY
Income Statement
Sales (40,000 units at $33.75 per unit) $ 1,350,000
Cost of goods sold:
Beginning inventory $ 0
Add cost of goods manufactured (50,000 units at $21 per unit) 1,050,000
Goods available for sale 1,050,000
Less ending inventory (10,000 units at $21 per unit) 210,000 840,000
Gross margin 510,000
Selling and administrative expenses 420,000
Operating income $ 90,000

The companys selling and administrative expenses consist of $300,000 per year in fixed expenses and $3 per unit sold in variable expenses. The companys $21 per unit product cost given above is computed as follows:

Direct materials $ 10
Direct labour 4
Variable manufacturing overhead 2
Fixed manufacturing overhead ($250,000 50,000 units) 5
Unit product cost $ 21

Required:

1. Redo the companys income statement in the contribution format using variable costing.

2. Reconcile any difference between the operating income on your variable costing income statement and the operating income on the absorption costing income statement above.

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