Analyzing Income under Absorption and Variable Costing

Variable manufacturing costs are $90 per unit, and fixed manufacturing costs are $93,800. Sales are estimated to be 5,000 units.

If an amount is zero, enter "0". Round intermediate calculations to the nearest cent and your final answers to the nearest dollar.

a. How much would absorption costing operating income differ between a plan to produce 5,000 units and a plan to produce 6,700 units? $

b. How much would variable costing operating income differ between the two production plans? $

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a. Remember that under variable costing, regardless of whether 5,000 units or 6,700 units are manufactured, no fixed manufacturing costs are allocated to the units manufactured. Instead, all fixed manufacturing costs are treated as a period expense. Therefore the change in units times the per unit fixed costs for the greater production level is the difference in income between the two costing methods.

b. Remember that since all fixed manufacturing costs are treated as period expenses under variable costing, there are no differences in income between the two plans.