Answer:
1 a. Year 1 unit product cost = 45
      Year 2 unit product cost = 45
Notes: Unit product cost = Direct materials + direct labor + Variable manufacturing overhead = 25 + 15 + 5 = 45 units
1 b.                        Income statement
                                                      Year 1           Year 2
Sales                                         2,400,000    3,000,000
(40000*60); (50000*60)
Less:
Variable cost of goods sold     1,800,000     2,250,000    
Variable selling and adm.          80,000         100,000
Contribution margin                520,000        650,000
Less:
Fixed manufacturing overhead  250,000      250,000    
Fixed selling & adm expense      80,000         80,000
Net income                                  $190,000     $320,000
2 a.  Notes
                                                              Year 1   Year 2
Direct materials                                      25     25  
Direct labor                                              15     15  
Variable manufacturing overhead         5         5  
Fixed manufacturing overhead             <u> 5      6.25</u>
(250,000/50,000); (250,000/40000)
Unit product cost                                    50    51.25
b.                                 Income statement
                                               Year 1         Year 2
Sales                                   2400000    3000000
Less: cost of goods sold   <u>2000000</u>    <u>2550000</u>
Gross margin                      400,000     450,000
Less: Selling and                <u>160,000</u> <u> 180,000</u>
administrative expense  
Net income                         240,000     270,000
Workings
Cost of goods sold for year 2 = (10,000* 50) + (40000 * 51.25)
= 500,000 + 2,050,000
= 25,500,000
3. Reconciliation                                Year 1          Year 2
Variable costing net operating        190,000      320,000	
income (loss)    
Add: Deferred fixed overhead          50,000
in ending inventory (10000*5)  
Less: Fixed overhead realized        <u>                     -50,000</u>
in beginning inventory(10000*5)
Absorption costing net operating   $240,000    270,000
income (loss)