The Zeta Company manufactures trendy, good-looking, moderately priced umbrellas. As Zeta’s senior financial analyst, you are asked to recommend a method of inventory costing. The CFO will use your recommendation to prepare Zeta’s 2017 income statement. The following data are for the year ended December 31, 2017:

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 in the month in which it occurs.
1. Prepare income statements under variable and absorption costing for the year ended December 31, 2017.
2. What is Zeta’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?

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Beginning inventory, January 1, 2017 Ending inventory, December 31, 2017 2017 sales Selling price (to distributor) Variable manufacturing cost per unit, including direct materials Variable operating (marketing) cost per unit sold 100,000 units 50,000 units 400,000 units $25 per unit $6 per unit $2 per unit sold Fixed manufacturing costs Denominator-level machine-hours Standard production rate Fixed operating (marketing) costs $1,625,000 6,500 50 units per machine-hour $1,100,000