Q1. Whitman Company has just completed its first year of operations. The companys accountant has

prepared an income statement for the year as follows (absorption costing basis):

Sales (35,000 units at $25) Less cost of goods sold: Beginning inventory

$875,000

$0 $640,000 $640,000

$80,000 $560,000 $315,000 $280,000

$35,000

WHITMAN COMPANY Income Statement

Add cost of goods manufactured (40,000 units at $16) Goods available for sale Less ending inventory (5,000 units at $16)

Gross margin Less selling and administrative expenses Net income

The companys selling and administrative expenses consist of $210,000 per year in fixed expenses and $2 per unit sold in variable expenses. The $16 unit product cost given above is computed as follows:

Direct materials $5 Direct labor $6 Variable manufacturing overhead $1 Fixed manufacturing overhead ($160,000/40,000 units) $4

Unit product cost $16

Required:

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

2. Reconcile any difference between the net income figure on your variable costing income statement

   and the net income figures on the absorption costing income statement above.

Q2. High Country Inc. produces and sells many recreational products. The company has just opened a new plant to produce a folding camp cot that will be marketed throughout the United States. The following cost and revenue data relate to May, the first month of the plants operation:

Beginning inventory 0

Units produced Units sold Selling price per unit $75

Selling and administrative expenses: Variable per unit $6

Fixed (total)

$200,000

Manufacturing costs: Direct materials cost per unit $20 Direct labor cost per unit $8 Variable manufacturing overhead cost per unit $2

Fixed manufacturing overhead cost (total)

$100,000

10,000 8,000

Management is anxious to see how profitable the new camp cot will be and has asked that an income statement be prepared for May.

Required:

1. Assume that the company uses absorption costing.

   1. a) Determine the unit product cost.

   2. b) Prepare an income statement for May.

2. Assume that the company uses the contribution approach with variable costing.

   1. a) Determine the unit product cost.

   2. b) Prepare an income statement for May.

3. Explain the reason for any difference in the ending inventory under the two costing methods and the impact of this difference on reported net income.