Problem:

Cutting Edge Corp. produces sporting equipment. In 2012, the first year of operations, Cutting Edge produced 25,000 units and sold 20,000 units. In 2013, the production and sales results were exactly reversed. In each year, selling price was $100, variable manufacturing costs were $40 per unit, variable selling expenses were $8 per unit, fixed manufacturing costs were $540,000, and fixed administrative expenses were $200,000.

Required:

Question 1: Compute the net income under variable costing for each year.

Question 2: Compute the net income under absorption costing for each year.

Question 3: Reconcile the differences each year in income from operations under the two costing approaches.

Note: Be sure to show how you arrived at your answer.