Exercise (02): Variable versus absorption costing. The Zwatch Company manufactures trendy, high-quality moderately priced watches. As Zwatch's senior financial analyst, you are asked to recommend a method of inventory costing. The CFO will use your recommendation to prepare Zwatch's 2012 income statement. The following data are for the year ended December 31, 2012: Beginning inventory, January 1, 2012 Ending inventory, December 31, 2012 2012 sales Selling price (to distributor) 85,000 units 34,500 units 345,400 units $22.00 per unit Variable manufacturing cost per unit, including $5.10 per unit direct materials Variable operating (marketing) cost per unit sold Fixed manufacturing costs Denominator-level machine-hours Standard production rate Fixed operating (marketing) costs $1.10 per unit sold $1,440,000 6,000 50 units per machine-hour $1,080,000 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. Required: 1. Prepare income statements under variable and absorption costing for the year ended December 31, 2012. 2. What is Zwatch's operating income as percentage of revenues under each costing method? 3. Explain the difference in operating income between the two methods.