Audiophonics Limited manufactures and sells high-quality and durable ear buds for personal use. Cost data for the product are as follows: Variable costs per unit: Direct materials $12 Direct labour $24 Variable manufacturing $8 overhead Variable selling and administrative $6 Fixed costs per month: Fixed manufacturing overhead $240,000 Fixed selling and administrative $180,000 The product sells for $80 per unit. Production and sales data for May and June, the first two months of operations, are as follows: May June Units Produced Units Sold 15,000 15,000 13,000 17,000 Income statements using absorption costing are presented below: May $1,040,000 June Sales $1,360,000 Cost of goods sold: Beginning inventory Add: cost of goods 0 120,000 900,000 900,000 manufactured Goods available for sale 900,000 1,020,000 Less ending inventory 120,000 0 Cost of goods sold 780,000 1,020,000 Gross margin 260,000 340,000 Selling and administrative 258,000 282,000 expenses Operating income $2,000 $ 58,000 Page 9 of 20 Required 1. The owner of Audiophonics Limited, Lydia, will apply for a loan from the bank at the end of June. The bank assesses cumulative profits over the months of operation in deciding whether or not to grant a loan. Should Lydia use variable costing or absorption costing to prepare the income statements she will provide to the bank? Explain. No calculations are needed. 4 marks