Fagan Manufacturing uses an absorption costing system. In 2009 it manufactured 25,000 units and sold 20,000 units at $45 each. The company's income statement for year ended December 31 2009 is as follows:

FAGAN MANUFACTURING COMPANY

INCOME STATEMENT

FOR THE YEAR ENDING DECEMBER 31, 2009

Sales $900,000

Cost of goods sold:

Finished goods inventory, January 1 $0

Cost of goods manufactured 812,500

Goods available for sale $812,500

Finished goods inventory, December 31 162,500

Cost of goods sold 650,000

Gross margin $250,000

Less Operating expenses:

Selling $135,000

Administrative 30,000

Total selling and administrative 165,000

Operating profit $85,000

The following additional information is available:

Variable costs per unit:

Direct materials $9.50

Direct labor 12.00

Manufacturing overhead 4.00

Selling expenses 5.50

Fixed costs for the period:

Manufacturing overhead $175,000

Selling 25,000

Administrative 30,000

1.In absorption costing, how much fixed manufacturing overhead cost was deferred (that is not expensed)in finished goods inventory?

2.i. Calculate the unit product cost under variable costing

ii. Prepare an income statement using variable costing.

3.Explain the difference in profit between absorption and variable costing