Please assist with the question below.

Teddy Ltd manufactures and sells a single product. The organisation uses a fully integrated absorption costing system for both internal and external reporting purposes. The comparative monthly results for the most recent two months (February and March 2019) have just been tabled at a meeting. The sales director says, our break-even point is 15 128 units. In February, we sold above our break-even point and made loss, and in March we sold below break-even point and made profit. This is clearly not correct!

The meeting confirms the following supporting data:

1. The actual selling price and prime cost elements for each month were as budgeted, namely:

Selling price R400 / unit.

Direct materials R120 / unit.

Direct labour R45 /unit.

2. Monthly manufacturing overheads were budgeted according to the following cost volume relationship:

Overhead	R900 000	R1 200 000
Production unit	10 000	25 000

The organisation's normal operating capacity for the purpose of deriving a predetermined overhead absorption rate is 20 000 units per month. All manufacturing overhead costs where exactly as budgeted.

3. Actual variable selling and fixed administration costs were as budgeted, namely:

Variable selling costs R20 per unit sold.

Fixed administration cost R2 250 000

4. Actual sales and production units for each month were as follows:

	February	March
Sales units	15 500	14 000
Production units	12 000	21 000

5. The organisation had 4000 units of finished goods in opening inventory on 1 February 2019. There were no opening or closing inventory of raw material or work-in-progress in either of the two months.

The sales director says, we have verified all the supporting financial data and it is correct. Perhaps the accountant could explain how this strange situation has arisen?

Required:

1. Prepare income statement for each month according to the organisation's existing method of reporting.

2. Prepare income statement for each month according to the variable costing system.

3. Reconcile and explain to the sales director the differences between the two statements given for 1 an 2 above in such a way to eliminate his confusion. State why both statements may be acceptable.

4. Discuss the arguments put forward for the use of variable costing system.