Ceramtics manufactures a high-speed ceramic switch used in the telecommunications industry. Data about Ceramtics’s operations for 2017 and 2018 are presented below:

Ceramtics

Summary of Operations

          2017 and 2018

2017                                                       2018

Sales price/switch $4,400                                                   $4,400

Number of switches sold 2,000                                                     2,000

Number of switches produced 2,400                                                     1,600

Fixed manufacturing costs $2.4 million                                         $2.4 million

Variable manufacturing costs per switch $2,800                                                   $2,800

Ceramtics had no beginning inventories in 2017. To simplify the computations, assume Ceramtics has only manufacturing expenses (i.e., there are no selling, administration, distribution, or interest expenses and no taxes). Ceramtics uses the FIFO method for inventory costing. Assume that budgeted volume and actual volume are the same, budgeted fixed and actual fixed overhead are the same, and budgeted variable and actual variable overhead per switch are the same. In other words, at the end of the year there is no over- or underabsorbed overhead.

Required:

a. Prepare income statements for 2017 and 2018 using absorption costing.

b. Prepare income statements for 2017 and 2018 using variable costing.

c. Reconcile any differences in income for 2017 and 2018 between absorption costing and variable costing from parts (a) and (b). That is, explain why absorption and variable costing give different net income numbers in 2017 and 2018.