Refer to the information for Overhill, Inc., in PA5-4 Additional information for Overhill’s most recent year of operations follows:

Required:

1. Without any calculations, explain whether Overhill’s income will be higher with full absorption costing or variable costing.

2. Prepare a full absorption costing income statement and a variable costing income statement for Overhill. Assume there was no beginning inventory.

3. Compute the difference in profit between full absorption costing and variable costing. Reconcile the difference.

Data from PA5-4

Overhill, Inc., produces one model of mountain bike. Partial information for the company follows.

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Number of units produced Number of units sold Sales price per unit Direct materials per unit Direct labor per unit Variable manufacturing overhead per unit Fixed manufacturing overhead ($235,000/2,000 units) Variable selling expenses ($10 per unit sold) Fixed general and administrative expenses 2,000 1,300 $ 650.00 110.00 90.00 40.00 117.50 13,000.00 70,000.00