Walsh Company manufactures and sells one product. The following information pertains to each of the companys first two years of operations:

Variable costs per unit:
Manufacturing:
Direct materials	$	27
Direct labor	$	14
Variable manufacturing overhead	$	5
Variable selling and administrative	$	4
Fixed costs per year:
Fixed manufacturing overhead	$	400,000
Fixed selling and administrative expenses	$	90,000

During its first year of operations, Walsh produced 50,000 units and sold 40,000 units. During its second year of operations, it produced 40,000 units and sold 50,000 units. The selling price of the companys product is $54 per unit.

Required:

1. Prepare an income statement for Year 1 and Year 2.

2. Reconcile the difference between variable costing and absorption costing net operating income in Year 1.

Walsh Company Income Statement Year 1 Year 2 Sales $ 2,160,000 $ 2,700,000 2,240,000 X 2,720,000 X (80,000) X (20,000) X Cost of goods sold Gross margin Selling and administrative expenses Net operating income (loss) 250,000 290,000 $ (310,000) $ (330,000) Year 1 Year 2 $ 330,000 X $ 290,000 X Variable costing net operating income (loss) Add: Fixed manufacturing overhead cost released from inventory under absorption costing Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing Absorption costing net operating income (loss)