The Carley Company differs from the Marple Company (described in Problem 4-21) in only one respect: it has both variable and fixed manufacturing costs. Its variable costs are $0.14 per litre and its fixed manufacturing costs are $390,000 per year.

1. Using the same data as in the preceding problem, except for the change in production-cost behaviour, prepare three-column income statements for 2006, for 2007 and for the two years together using

(a) variable costing and

(b) absorption costing.

2. What inventory costs would be carried on the balance sheets on December 31, 2006 and 2007, under each method?