P7-2A. Variable and Absorption Costing Summarized data for 2016 (the first year of operations) for

Gorman Products, Inc., are as follows:

Sales (75,000 units) ....................................... $3,000,000

Production costs (80,000 units):

Direct material.......................................... 880,000

Direct labor ............................................ 720,000

Manufacturing overhead:

Variable ............................................... 544,000

Fixed ................................................. 320,000

Operating expenses:

Variable ............................................... 168,000

Fixed ................................................. 240,000

Depreciation on equipment ................................. 60,000

Real estate taxes ......................................... 18,000

Personal property taxes (on inventory and equipment) ............ 28,800

Personnel department expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000

Required

a. Prepare an income statement based on full absorption costing.

b. Prepare an income statement based on variable costing.

c. Assume that you must decide quickly whether to accept a special one-time order for 1,000 units

for $30 per unit. Which income statement presents the most relevant data? Determine the appar-

ent profit or loss on the special order based solely on these data.

d. If the ending inventory is destroyed by fire, which costing approach would you use as a basis for

filing an insurance claim for the fire loss? Why?