Accounting for Decision Making and Control 6th Edition by Jerold Zimmerman

Exercise 17

Alliance Tooling produces a single product in its plant. At the beginning of the year, there were no units in inventory. During the year, Alliance produced 120,000 units and sold 100,000 units at $26.75 per unit. Variable manufacturing costs are $13.50 per unit. Alliance pays $2.70 per unit for sales commissions and shipping. It has fixed costs of $720,000 for selling and administration. Its tax rate is 40 percent.
Required:
a. Prepare an income statement for Alliance Tooling using absorption costing.
b. Prepare an income statement for Alliance Tooling using variable costing.
c. Explain why the net income figures computed in (a) and (b) differ.