Variable Costing Income Statement

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

	(in millions)
Sales	$240,390
Operating costs:
Cost of products sold	$(115,390)
Marketing, administrative, and other expenses	(76,920)
Total operating costs	$(192,310)
Operating income	$48,080

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

			(in millions)
Cost of products sold			$64,910
Marketing, administrative, and other expenses			31,250

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

The Bluth Company
Variable Costing Income Statement (assumed)
(in millions)
Sales		$fill in the blank 9169f0ffd04007b_2
Variable cost of products sold		fill in the blank 9169f0ffd04007b_4
Manufacturing margin		$fill in the blank 9169f0ffd04007b_6
Variable marketing, administrative, and other expenses		fill in the blank 9169f0ffd04007b_8
Contribution margin		$fill in the blank 9169f0ffd04007b_10
Fixed costs:
Fixed manufacturing costs	$fill in the blank 9169f0ffd04007b_12
Fixed marketing, administrative, and other expenses	fill in the blank 9169f0ffd04007b_14
Total fixed costs		fill in the blank 9169f0ffd04007b_16
Operating income		$fill in the blank 9169f0ffd04007b_18

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

If the Bluth company reduced its inventories during the period, then the cost of products sold would include fixed costs allocated to the beginning inventories. Thus, the total fixed costs of products sold on the absorption costing income statement would be higher , and the operating income would be lower .