The managers of Sawgrass Distributors limited currently employ a policy of marginal costing system, but want to explore the benefits of absorption costing. Below are data relevant to the year ended December 31, 2012 and 2013: 2012 2013 Selling price per unit $150 $150 Labour cost per unit $20 $20 Direct material per unit $25 $25 Direct expense per unit $5 $5 Variable overheads per unit $10 $10 Fixed overheads (actual) $1,500,000 $2,500,000 Variable selling expenses per unit $10 $10 Actual production 150,000 150,000 Actual sales 130,000 150,000 On January 1, 2012, the company had 20,000 units valued at a cost of $1,240,000. For both periods the entity budgeted fixed overhead to be $1,000,000 and budgeted production of 500,000 units. Overheads are absorbed on a per unit basis currently.

Required:

a. Prepare an income statement using variable/marginal as well as absorption costing for the year ended December 31,2012.

b. Prepare an income statement using variable/marginal as well as absorption costing for the year ended December 31, 2013.

c. Prepare a reconciliation between both profits for both years.