The Jones Company manufactures and sells a unique electronic part. The company's plant is highly automated with low variable and high fixed manufacturing costs. Operating results on an absorption costing basis for the first three years of activity were as follows:

Additional information about the company is as follows:

-Variable manufacturing costs (direct labour, direct materials, and variable manufacturing overhead) total $3 per unit, and fixed manufacturing overhead costs total $400,000. -Fixed manufacturing costs are applied to units of product on the basis of the number of units produced each year (i.e., a new fixed overhead rate is computed each year).

-The company uses a FIFO inventory flow assumption. -Variable selling and administrative expenses are $2 per unit sold. Fixed selling and administrative expenses total $100,000.

Required:

a) Compute operating income for year 2 and 3 under the variable costing approach. b) Prepare a reconciliation from your Operating Income (loss) under variable costing to Absorption Costing operating income for year 3.

Year 1 $704,000 Year 2 $528,000 Year 3 $704,000 0 520,000 0 550,000 220,000 496,000 0 Sales Cost of goods sold: Beginning inventory Cost of goods manufactured Ending inventory Cost of goods sold Gross margin Less selling and administrative expense Operating income (loss) 520,000 184,000 180,000 (220,000) 330,000 198,000 160,000 (186,000). 530,000 174,000 180,000 $4,000 $38,000 $(6,000) Sales in units 40,000 30,000 40,000 Production in units 40,000 50,000 32,000