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.