# Problem 3 – Variable costing (40 points) (265) Miller Corporation produces a single product. The company had the following results for its first two years of operation: Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating income Year 1 \$1,200,000 800,000 400,000 300,000 \$100,000 Year 2 \$1,200,000 680,000 520,000 300,000 \$220,000 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. Fixed manufacturing overhead cost is \$600,000 a year and was 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. 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.

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