The Davis Company Manufactures and markets a single product. The following data are available

• In 2005, variable manufacturing costs were $3 per unit.
• The standard machine hours to make one unit of the product is 0.1 hours. The company produced 550,000 units during the year.
• Total fixed manufacturing costs were $440,000. Fixed manufacturing overhead was allocated using 55,000 machine hours as the basis.
• The selling price is $5 per unit.
• Variable marketing and administrative costs, which are driven by units sold, were $1 per unit. Fixed marketing and administrative costs were $120,000.
• Sales in 2005 were 540,000 units.

1. Prepare a gross-margin based income statement (income statement as would be prepared under GAAP) to compute the income before taxes for 2005.
2. Prepare a contribution-margin based income statement.
3. If there is any difference between parts 1 and 2, explain the reason for such a difference.