Variable and Absorption Costing

Valux manufactures a single product and sells it for $10 per unit. At the beginning of the year there were 1,000 units in inventory. Upon further investigation, you discover that units produced last year had $3.00 of fixed manufacturing cost and $2.00 of variable manufacturing cost. During the year Valux produced 10,000 units of product. Each unit produced generated $3.00 of variable manufacturing cost. Total fixed manufacturing cost for the current year was $40,000. There were no inventories at the end of the year.

Required:

a. Prepare two income statements for the current year, one on a variable cost basis and the other on an absorption cost basis.

b. Explain any difference between the two net income numbers and provide calculations supporting your explanation of the difference.