P & B Ltd manufactures and sells pens. The total fixed costs is $456,500 per year. The price per unit is $18.75; the variable costs per unit is $13.50; the income tax rate is 35%; and the net profit, after tax, is $1,103,537.50

Required

1. Prepare the income statement using the variable costing system(contribution margin). [3 marks]

2. How many units does the company need to sell, to break even? How many units does it need to sell, to earn a net profit, before tax, of $120,000? What is the companys net profit, after tax, if it sells 470,000 units? [9 marks]

3. If the company produces 450,000 units in one year, and sells 420,000 of them, which method of computing operating income (absorption costing (gross margin) or variable costing (contribution margin)) will result in a higher operating income? Why? (Provide only a written explanation; no calculations are required). [3 marks]