Miller Corporation Produces a Single Product

Essay

Miller Corporation produces a single product. The company had the following results for its first two years of operation:

In Year 1, the company produced and sold 40,000 units of its only product; in Year 2, the company again sold 40,000 units, but increased production to 50,000 units. The company's variable production cost is $5 per unit and its fixed manufacturing overhead cost is $600,000 a year. Fixed manufacturing overhead costs are applied to the product on the basis of each year's unit production (i.e., a new fixed manufacturing overhead rate is computed each year). Variable selling and administrative expenses are $2 per unit sold.
Required:
a.Compute the unit product cost for each year under absorption costing and under variable costing.
b. Prepare a contribution format income statement for each year using variable costing.
c. Reconcile the variable costing and absorption costing income figures for each year.
d. Explain why the net operating income for Year 2 under absorption costing was higher than the net operating income for Year 1, although the same number of units were sold in each year.