This makes no sense at all said Michael, managing director of NI Ltd. We sold the same number of units this year as we did last yet our operating profits have more than doubled. who made the goof, the computer or the people who operate it?". The statements that bewildered Michael are shown below, folowing to an absorption costing aggregation ear ear Sales (20,000 units each 700,000 700,000 year) Less cost of goods sold Gross margin Less selling and 460,000 240,000 200,000 400,000 300,000 200,000 administrative expenses Operating profit 40,000 100,000 The statements above show the results of the first two years of operation. In the first year, NI Ltd produced and sold 20,000 units; in the second year, it again sold 20,000 units, but it increased production in order to have a stock of units at hand, as shown below Production in units Sales in units Variable production cost per Year 1 0,000 20,000 8 Year 2 25,000 20,000 E8 Fixed manufacturing overhead costs (total 300,000 300,000 NI Ltd produces a single product; fixed manufacturing overhead costs are applied to the product on the basis of each years production. Variable selling and administrative expenses are 1 per unit sold Requirement 1 Compute the unit product cost for each year under both absorption and variable costing 10 Marks 2) Prepare a statement of profit or loss for each year, using the contribution approach with 10 Marks 3) Reconcile the variable costing and absorption costing operating profit figures for each 5 Marks 4) Explain to Michael why, under absorption costing, the operating profit for Year 2 was higher 3 Marks 5) Explain how operations would have been different if NI Ltd had adopted a Just in Time 2 Marks variable costing. year than for Year 1, although the same number of units was sold in each year inventory method 30 Marks