Bobby Smith and Sons Company was concerned that increased sales did not result in increased profits for 20X6. Both variable unit and total fixed manufacturing costs for 20X5 and 20X6 remained constant at $20 and $2,000,000, respectively.
In 20X5, the company produced 100,000 units and sold 80,000 units at a price of $50 per unit. There was no beginning inventory in 20X5. In 20X6, the company made 70,000 units and sold 90,000 units at a price of $50. Selling and administrative expenses were all fixed at $100,000 each year.
Required:
a. Prepare income statements for each year using absorption costing.
b. Prepare income statements for each year using variable costing.
c. Explain why the income was different each year using the two methods. Show computations.