The Tomlinson Company manufactures trendy, high-quality, moderately priced watches. As Tomlinson’s senior financial analyst, you are asked to recommend a method of inventory costing. The CFO will use your recommendation to prepare Tomlinson’s 2017 income statement.

The following data are for the year ended December 31, 2017:

Beginning inventory, January 1, 2017 ………………………………….                     90,000 units

Ending inventory, December 31, 2017 …………………………………                    34,000 units

2017 sales ……………………………………………………………….                                433,000 units

Selling price (to distributor) …………………………………………….                         $24.00 per unit

Variable manufacturing cost per unit, including direct materials ………      $5.40 per unit

Variable operating (marketing) cost per unit sold ………………………              $1.20 per unit sold

Fixed manufacturing costs ……………………………………………..                  $1,852,200

Denominator-level machine-hours …………………………………….                        6,300

Standard production rate ……………………………………………..                                   60 units per machine-hour

Fixed operating (marketing) costs ……………………………………                 $1,130,000

Required

Assume standard costs per unit are the same for units in beginning inventory and units produced during the year. Also, assume no price, spending, or efficiency variances. Any production-volume variance is written off to cost of goods sold.

1. Prepare income statements under variable and absorption costing for the year ended December 31, 2017.

2. What is Tomlinson's operating income as percentage of revenues under each costing method?

3. Explain the difference in operating income between the two methods.

4. Which costing method would you recommend to the CFO? Why?