Jackson Company produces plastic that is used for injection-molding applications such as gears for small motors. In 2016, the first year of operations, Jackson produced 4,000 tons of plastic and sold 3,500 tons. In 2017, the production and sales results were exactly reversed. In each year, the selling price per ton was $2,000, variable manufacturing costs were 15% of the sales price of units produced, variable selling expenses were 10% of the selling price of units sold, fixed manufacturing costs were $2,800,000, and fixed administrative expenses were $500,000. Prepare income statements for each year using absorption costing.

Instructions are below.

Explanation:

The absorption costing method includes all costs related to production, both fixed and variable. The unit product cost is calculated using direct material, direct labor, and total unitary manufacturing overhead.

First, we need to calculate the unitary production cost:

Unitary fixed overhead= 2,800,000/4,000= $700

Unitary cost= (2,000*0.15) + 700= $1,000

Income statement:

Sales= 3,500*2,000= 7,000,000

COGS= 3,500*1,000= (3,500,000)

Gross margin= 3,500,000

Total selling expenses= (7,000,000*0.1)= (700,000)

Total administrative expenses= (500,000)

Net operating income= 2,300,000

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