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Fletcher Company manufactures and sells one product. The following information pertains to each of the company's first two years of operations:
Variable costs per unit:Manufacturing:Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12Variable manufacturing overhead . . . . . . . . . . . . . . $4Variable selling and administrative . . . . . . . . . . . . . . . $3Fixed costs per year:Fixed manufacturing overhead . . . . . . . . . . . . . . . . . . $200,000Fixed selling and administrative expenses . . . . . . . . . $80,000During its first year of operations, Fletcher 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 company's product is $50 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 incomes differ in year 2.
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