Problem:
Kenai Kayaking, a manufacturer of kayaks, began operations this year. During this first year, the company produced 1,050 kayaks and sold 800. At the current year-end, the company reported the following income statement information using absorption costing.
Sales (800 A? $1,050) . . . . . . . . . . . . . . . . . $840,000
Cost of goods sold (800 A? $500) . . . . . . . . 400,000
Gross margin . . . . . . . . . . . . . . . . . . . . . . . 440,000
Selling and administrative expenses . . . . . 230,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . $210,000
Additional Information
a. Production cost per kayak totals $500, which consists of $400 in variable production cost and $100 in fixed production cost-the latter amount is based on $105,000 of fixed production costs allocated to the 1,050 kayaks produced.
b. The $230,000 in selling and administrative expense consists of $75,000 that is variable and $155,000 that is fixed.
1. Prepare an income statement for the current year of Kenai Kayaking under variable costing.
2. Explain the difference in income between the variable costing and absorption costing income statement.