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 . . . . . . . . . . . . . . . . . . . . . . . . . . . $25 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15 Variable manufacturing overhead . . . . . . . . . . . . . $5 Variable selling and administrative . . . . . . . . . . . . . . $2 Fixed costs per year: Fixed manufacturing overhead . . . . . . . . . . . . . . . . . $250,000 Fixed selling and administrative expenses . . . . . . . . $80,000

Total Company East West Sales . . . . . . . . . . . . . . . . . . . . . . . . . $900,000 $600,000 $300,000 Variable expenses . . . . . . . . . . . . . . . 675,000 480,000 195,000 Contribution margin . . . . . . . . . . . . . . 225,000 120,000 105,000 Traceable fixed expenses . . . . . . . . . . 141,000 50,000 91,000 Segment margin . . . . . . . . . . . . . . . . . 84,000 $ 70,000 $ 14,000 Common fixed expenses . . . . . . . . . . 59,000 Net operating income . . . . . . . . . . . . . $ 25,000 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 $60 per unit. Required: 1. Assume the company uses variable costing: a. Compute the unit product cost for Year 1 and Year 2. b. Prepare an income statement for Year 1 and Year 2. 2. Assume the company uses absorption costing: a. Compute the unit product cost for Year 1 and Year 2. b. Prepare an income statement for Year 1 and Year 2. 3. Explain the difference between variable costing and absorption costing net operating income in Year 1. Also, explain why the two net operating income figures differ in Year 2.