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		$ 26
Direct labor		$ 16
Variable manufacturing overhead		$ 3
Variable selling and administrative		$ 2
Fixed costs per year:
Fixed manufacturing overhead	$	400,000
Fixed selling and administrative expenses	$	70,000

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.	Assume the company uses variable costing:

a.	Compute the unit product cost for year 1 and year 2.

	Year 1	Year 2
Unit product cost	$45	$45

b.

Prepare an income statement for year 1 and year 2.

Walsh Company
Income Statement
	Year 1	Year 2
Sales	$2,160,000	$2,700,000
Variable expenses
Variable cost of goods sold	1,800,000	2,250,000
Variable selling and administrative	80,000	100,000
Total variable expenses	1,880,000	2,350,000
Contribution margin	280,000	350,000
Fixed expenses
Fixed manufacturing overhead	400,000	400,000
Fixed selling and administrative expense	70,000	70,000
Total fixed expenses	470,000	470,000
Net operating income (loss)	$(190,000)	$(120,000)

2.	Assume the company uses absorption costing:

a.

Compute the unit product cost for year 1 and year 2. (Round your answer to 2 decimal places.)

	Year 1	Year 2
Unit product cost	$53.00	$55.00

b.

Prepare an income statement for year 1 and year 2. (Round your intermediate calculations to 2 decimal places)

Walsh Company
Income Statement
	Year 1	Year 2
Sales	$2,160,000	$2,700,000
Cost of goods sold	2,120,000	2,730,000
Gross margin	40,000	(30,000)
Selling and administrative expenses	150,000	170,000
Net operating income (loss)	$(110,000)	$(200,000)

3.

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

	Year 1	Year 2
Variable costing net operating income (loss)
Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing
Deduct: Fixed manufacturing overhead cost released from inventory under absorption costing
Absorption costing net operating income (loss)	$0	$0