'This makes no sense at all,' said Bill Sharp, managing director of Essex |Company. 'We sold the same number of units this year as we did last year, yet our prots have more than doubled. Who made the goof the computer or the people who operate it?' The statements to which Mr Sharp was referring are shown below {absorption costing basis}: Year 1 Year 2 Sales (20,000 units each year) E 820000 E 820,000 Less cost of goods sold 550,000 4703.000 Gross margin 270,000 342,000 Less selling and administrative expenses 200,000 200,000 Prot E 20000 E 142,000 The statements above show the results of the rst two years of operation. In the rst year, the company produced and sold 20,000 units; in the second year, the company again sold 20,000 units, but it increased production in order to have a inventory of units on hand, as shown below: Year 1 Year 2 Production in units 20,000 25,000 Sales in units 20,000 20,000 Variable production cost per unit E 10 E 10 Fixed manufacturing overhead costs (total) E 360,000 E 25,000 Essex Company produces a single product; fixed manufacturing overhead costs are applied to the product on the basis of each year's production. (Thus, a new fixed manufacturing overhead rate is computed each year.) Variable selling and administrative expenses are E1 per unit sold. 2. Prepare a statement of prot and loss for each year, using the contribution approach with variable costing. [Enter all answers as a positive values except losses which should be indicated with a minus sign.) Sales Less variable expenses: Variable cost of goods sold: Beginning inventory Add variable manufacturing costs Goods available for sale Less ending inventory Variable cost of goods sold Variable selling expense and administrative expenses Contribution margin Less xed expenses: Fixed manufacturing overhead E 360000 _ E 25,000 _ Fixed selling and administrative expenses E 200000 - a 200,000