Johnson and Sons Company was concerned that increased sales did not result in increased profits for 2016. Both variable unit and total fixed manufacturing costs for 2015 and 2016 remained constant at $20 and $2,000,000, respectively.
In 2015 the company produced 100,000 units and sold 80,000 units at a price of $50 per unit. There was no beginning inventory in 2011. In 2016 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 in the gross margin format.
b. Prepare income statements for each year using variable costing in the contribution margin format.
c. Explain why the income was different each year using the two methods. Show computations.

Question

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The Answer of Johnson and Sons Company was concerned that increased sales did not result in increased profits for 2016. Both variable unit and total fixed manufacturing costs for 2015 and 2016 remained constant at $20 and $2,000,000, respectively.
In 2015 the company produced 100,000 units and sold 80,000 units at a price of $50 per unit. There was no beginning inventory in 2011. In 2016 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 in the gross margin format.
b. Prepare income statements for each year using variable costing in the contribution margin format.
c. Explain why the income was different each year using the two methods. Show computations.

Johnson and Sons Company Was Concerned That Increased Sales Did