Ewing Company Planned to Be in Operation for Three Years

Essay

Ewing Company planned to be in operation for three years. During the first year, it had no sales but incurred $120,000 in variable manufacturing expenses and $40,000 in fixed manufacturing expenses. In the next year, it sold half of the finished goods inventory from the previous year for $100,000 but it had no manufacturing costs. In the third year, it sold the remainder of the inventory for $120,000, had no manufacturing expenses and went out of business. Marketing and administrative expenses were fixed and totalled $20,000 each year.
Required:
a. Prepare an income statement for each year using absorption costing in the gross margin format.
b. Prepare an income statement for each year using variable costing contribution margin format.