The Liberty Company had the following manufacturing data for the year 2012 (in thousands of dollars):

Beginning and ending inventories None

Direct material used $410

Direct labor 330

Supplies 25

Utilitiesvariable portion 42

Utilitiesfixed portion 17

Indirect laborvariable portion 93

Indirect laborfixed portion 51

Depreciation 215

Property taxes 18

Supervisory salaries 59

Selling expenses were $296,000 (including $76,000 that were variable) and general administrative expenses were $149,000 (including $21,000 that were variable). Sales were $2.5 million.

Direct labor and supplies are regarded as variable costs.

1. Prepare two income statements, one using the contribution approach and one using the absorption approach.

2. Suppose that all variable costs fluctuate directly in proportion to sales and that fixed costs are unaffected over a very wide range of sales. What would operating income have been if sales had been $2.3 million instead of $2.5 million? Which income statement did you use to help obtain your answer? Why?