At the end of 2020 management is eager to determine profitability as bonuses are paid to senior managers using return on investment. It was determined that actual production for the year was 46,000 monitors and 40,000 monitors were sold. At the beginning of the year there were 1,500 monitors in inventory and unsold monitors were recorded on the balance sheet at standard cost.

All product costs for 2020 were at standard costs determined at the beginning of the year. As such there are no price, efficiency, or rate variances. Any production volume variance is written off to the cost of goods sold for the year. Standard product costs were the same for 2019.

Variable selling and administrative expenses were $14.00 per monitor sold. Fixed selling and administrative expenses were $258,000. The selling price per monitor was $110.00

a.M4U's controller is concerned about the rising levels of inventory. As such, she asks you to assess the 2020 operating income by preparing the following:

i.An income statement using absorption costing in the gross margin format. Use the normal level of activity when determining the overhead application rate.(Use the next page for your answer) (5 marks)

ii.An income statement using variable costing in the contribution margin format. (Use the next page for your answer) (5 marks)

b.Provide the calculations (below) to reconcile the difference between the operating incomes calculated in part (c) (3 marks)

c.State your findings to the controller. It should include a response to her concerns about rising inventory levels and the effect on income. Explain to the controller one way in which these issues be controlled. (2 marks)

QUESTION 4 - (continued)

(c)Absorption costing income statement

(d)Variable costing income statement