Examine the Donaldson Company's simplified income statement based on variable costing. Assume that the budgeted volume for absorption costing in 20X0 and 20X1 was 1,400 units and that total fixed costs were identical in 20X0 and 20X1. There is no beginning or ending work in process.

Income Statement

Year Ended December 31, 20X1

Sales, 1,260 units at $12 $15,120

Deduct variable costs

Beginning inventory, 110 units at $6 $660

Variable manufacturing cost of goods manufactured, 1,200 units at $6 7,200

Variable manufacturing cost of goods available for sale $7,860

Ending inventory, 50 units at $6 300

Variable manufacturing cost of goods sold $7,560

Variable selling and administrative expenses 550

Total variable costs 8,110

Contribution margin $7,010

Deduct fixed costs

Fixed factory overhead at budget $4,480

Fixed selling and administrative expenses 400

Total fixed costs 4,880

Operating income $2,130

Requirements

1.	Prepare an income statement based on absorption costing. Assume that actual fixed costs were equal to budgeted fixed costs.
2.	Explain the difference in operating income between absorption costing and variable costing. Be specific.