Azul Metal Company produces the steel wire that goes into the production of paper clips. In 2012, the first year of operations, Azul produced 50,000 miles of wire and sold 45,000 miles. In 2013, the production and sales results were exactly reversed. In each year, selling price per mile was $60, variable manufacturing costs were 20% of the sales price, variable selling expenses were $8.00 per mile sold, fixed manufacturing costs were $1,200,000, and fixed administrative expenses were $230,000.
(a) Prepare comparative income statements for each year using variable costing.
(b) Prepare comparative income statements for each year using absorption costing.
(c) Reconcile the differences each year in income from operations under the two costing approaches.
(d) Comment on the effects of production and sales on net income under the two costing approaches.