Income statements under absorption costing and variable costing Crazy Mountain Sports Inc. assembles and sells snowmobile engines. The company began operations on March 1 and operated at 100% of capacity during the first month. The following data summarize the results for March:

Instructions

1	Sales (33,000 units)		$8,250,000.00
2	Production costs (40,500 units):
3	Direct materials	$3,240,000.00
4	Direct labor	1,822,500.00
5	Variable factory overhead	1,012,500.00
6	Fixed factory overhead	607,500.00	6,682,500.00
7	Selling and administrative expenses:
8	Variable selling and administrative expenses	$1,160,000.00
9	Fixed selling and administrative expenses	230,000.00	1,390,000.00

	Required:
a.	Prepare an income statement according to the absorption costing concept.
b.	Prepare an income statement according to the variable costing concept.
c.	What is the reason for the difference in the amount of Operating income reported in (a) and (b)?

Labels
Fixed costs
For the Month Ended March 31
March 31
Amount Descriptions
Contribution margin
Contribution margin ratio
Cost of goods sold
Fixed factory overhead costs
Fixed selling and administrative expenses
Gross profit
Operating income
Loss from operations
Manufacturing margin
Planned contribution margin
Sales
Sales mix
Selling and administrative expenses
Total fixed costs
Variable cost of goods sold
Variable selling and administrative expenses

a. Prepare an income statement according to the absorption costing concept.

Income Statement Instructions

Crazy Mountain Sports Inc.

Absorption Costing Income Statement

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b. Prepare an income statement according to the variable costing concept.

Income Statement Instructions

Crazy Mountain Sports Inc.

Variable Costing Income Statement

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c. What is the reason for the difference in the amount of Operating income reported in (a) and (b)? Check all that apply.

There is no difference; the Operating income reported in (a) and (b) is the same.

Under variable costing, all of the fixed factory overhead cost is deducted in the period in which it is incurred, regardless of the amount of inventory change.

Under absorption costing, when inventory increases, the income statement will have a higher Operating income than will the variable costing income statement.

Under absorption costing, when inventory increases, the income statement will have a lower Operating income than will the variable costing income statement.

Under variable costing, the units that were produced but unsold include fixed factory overhead cost, which is not included in cost of goods sold.