Sarah Stoner sells handmade jewelry that she designs herself. The items aren’t expensive, and she has a loyal following in her town and the surrounding area. Sarah incurred the following unit costs to produce 60,000 items.

Direct materials........... $3.00

Direct labor ...........$1.75

Variable overhead........... $0.75

Fixed overhead........... $4.25

Sarah began the year with no inventory. During the year she sold 45,000 items for $15 each, incurring $0.50 in selling costs per item plus $5,000 in advertising and other selling expenses.

Required

a. Under variable costing, what is Sarah’s operating income?

b. Under absorption costing, what is Sarah’s ending Finished Goods Inventory balance?