Sales price P15 per unit

Variable costs:

SG&A P2 per unit

Production P4 per unit

Fixed costs (total cost incurred for the

year):

SG&A P14,000

Production P20,000

During the first year, Sherrill Corporation manufactured 5,000 units and sold 3,800. There was no beginning or ending work-in-process inventory.

1. How much income before income taxes would be reported if Stanley uses absorption costing?

2. How much income before income taxes would be reported if variable costing was used?

3. Show why the two costing methods give different income amounts