RAYCO INC. "These statements can't be right," said Ben Yoder, president of Rayco Inc. Our sales in the second quarter were up by 25% over the first quarter, yet these income statements show a precipitous drop in the net operating income for the second quarter. Those accounting people have fouled something up." Mr. Yoder was referring to the following statements (absorption costing basis): RAYCO INC. Income statement For the First two Quarters Frist quarter Second quarter Sales $ 480,000 $ 600,000 Cost of goods sold $ 240,000 $ 372,000 _________________________________________ Gross margin $240,000 $228,000 Selling & Administration Exp $200,000 $215,000 ______________________________________________ Net operating income $40,000 $13,000 _________________________________________________ After studying the statements briefly, Mr. Yoder called in the controller to see if the mistake in the second quarter could be located before the figures were released to the press. The controller stated," I'm sorry to say that those figures are correct, Ben. I agree that sales went up during the second quarter, but the problem is in production. You see, we budgeted to produce 15,000 units each quarter, but a strike on the west coast among some of our suppliers forced us to cut production in the second quarter back to only 9,000 units. That's what caused the drop in the net operating income." Mr. Yoder was confused by the controller's explanation. He replied, "This doesn't make sense. I ask you to explain why net operating income dropped when sales went up and you talked about production! So what if we had to cut back production? We still were able to increase sales by 25%. If sales go up, then net operating income should go up. If your statements can't show a simple thing like that, then it's time for some changes in your department!" Budgeted production and sales for the year, along with actual production and sales for the first two quarters, are given below: Frist Second Third Fourth Budgeted sale 12000 15000 15000 18000 Actual sale (units) 12000 15000 ____ _____ Budgeted production (units) 15000 15000 15000 18000 Actual production (units) 15000 9000 ______ _______

REQUIRED: Please explain in detail that why Mr. Yoder is so confused about the income statements of first two quarters?