Hanks Corporation produces a single product. Operatingdata for the company and its absorption costing income statementsfor the last two years are presented below:
| Year 1 | Year 2 |
Units in beginning inventory | 0 | 1,000 |
Units produced | 9,000 | 9,000 |
Units sold | 8,000 | 10,000 |
| Year 1 | Year 2 |
Sales | $80,000 | $100,000 |
Cost of goods sold | 48,000 | 60,000 |
Gross margin | 32,000 | 40,000 |
Selling and administrative expenses | 28,000 | 30,000 |
Net operating income | $4,000 | $10,000 |
Variable manufacturing costs are $4 per unit. Fixedmanufacturing overhead was $18,000 in each year. This fixedmanufacturing overhead was applied at a rate of $2 per unit.Variable selling and administrative expenses were $1 per unitsold.
Required:
a. Compute the unit product cost in each year undervariable costing.
b. Prepare new income statements for each year usingvariable costing.
c. Reconcile the absorption costing and variable costingnet operating income for each year.
