Question :

168. Bobby Sons and Smith Company was concerned that increased sales did not result in increased profits for 20X6. Both variable unit and net fixed manufacturing costs for 20X5 and 20X6 remained constant at $20 and $2,000,000, correspondingly.

In 20X5, the company produced 100,000 units and sold 80,000 units at a price of $50 per unit. There was no starting inventory in 20X5. In 20X6, the company made 70,000 units and sold 90,000 units at a price of $50. Administrative and Selling expenses were all fixed at $100,000 each year.

Required:

a. Purpose income statements for each year using absorption costing.

b. Purpose income statements for each year using variable costing.

c. Describe why the income was different each year using the two methods.