Skinny Dippers, Inc. produces nonfat frozen yogurt. The product is sold in five-gallon containers, which have the following price and variable costs.

Sales price............................................................ $15

Direct material..................................................... 5

Direct labor............................................................ 2

Variable overhead............................................... 3

Budgeted fixed overhead in 20x1, the company's first year of operations, was $300,000. Actual production was 150,000 five-gallon containers, of which 125,000 were sold. Skinny Dippers, Inc. incurred the following selling and administrative expenses.

Fixed......................................................................... $50,000 for the year

Variable.................................................................. $1 per container sold

Required:

1. Compute the product cost per container of frozen yogurt under (a) variable costing and (b) absorption costing.

2. Prepare operating income statements for 20x1 using (a) absorption costing and (b) variable costing.

3. Reconcile the operating income reported under the two methods by listing the two key places where the income statements differ.