McFall Industries manufactures and sells a single product. The controller has prepared the following income statement for the most recent year:
McFall Industries
Income Statement (Absorption costing)
For the year ending December 31
Sales revenue.................................$1,050,000
Less: Cost of goods sold........................675,000
Gross profit....................................$ 375,000
Less: Operating expenses......................260,000
Operating income.............................$ 115,000
The company produced 20,000 units and sold 15,000 units during the year ending December 31. Fixed manufacturing overhead (MOH) for the year was $240,000, while fixed operating expenses were $200,000. The company had no beginning inventory.
Requirements
1. Will the company's operating income under variable costing be higher, lower, or the same as its operating income under absorption costing? Why?
2. Project the company's operating income under variable costing without preparing a variable costing income statement.
3. Prepare a variable costing income statement for the year.