1. Variable Costing Income Statement

   The following data were adapted from a recent income statement of Bluth Company:

   	(in millions)
   Sales	$169,190
   Operating costs:
   Cost of products sold	$81,210
   Marketing, administrative, and other expenses	54,140
   Total operating costs	$135,350
   Income from operations	$33,840

   Assume that the variable amount of each category of operating costs is as follows:

   			(in millions)
   Cost of products sold			$45,680
   Marketing, administrative, and other expenses			21,990

   a. Based on the data given, prepare a variable costing income statement for Bluth Company, assuming that the company maintained constant inventory levels during the period.

   Bluth Company
   Variable Costing Income Statement (assumed)
   (in millions)
   Contribution margin Manufacturing margin Sales Variable cost of products sold Variable marketing, administrative, and other expenses		$
   Contribution margin Fixed manufacturing costs Fixed marketing, administrative, and other expenses Variable cost of products sold Variable marketing, administrative, and other expenses
   Contribution margin Fixed manufacturing costs Manufacturing margin Variable cost of products sold Variable marketing, administrative, and other expenses		$
   Contribution margin Fixed manufacturing costs Fixed marketing, administrative, and other expenses Variable cost of products sold Variable marketing, administrative, and other expenses
   Contribution margin Fixed manufacturing costs Manufacturing margin Sales Variable cost of products sold		$
   Fixed costs:
   Fixed manufacturing costs Fixed manufacturing margin Fixed net sales Variable cost of products sold Variable marketing, administrative, and other expenses	$
   Fixed contribution margin Fixed marketing, administrative, and other expenses Fixed net sales Variable cost of products sold Variable marketing, administrative, and other expenses
   Contribution margin Income from operations Manufacturing margin Sales Total fixed costs
   Income from operations Loss from operations		$

   b. If Bluth Company reduced its inventories during the period, what impact would that have on the income from operations determined under absorption costing?

   If Bluth Company reduced its inventories during the period, then the cost of products sold would

   • include
   • exclude
   fixed costs allocated to the beginning inventories. Thus, the total fixed costs of products sold on the absorption costing income statement would be
   • higher
   • lower
   , and the income from operations would be
   • higher
   • lower
   .