Income Statements under Absorption Costing and Variable Costing Gallatin County Motors Inc. assembles and sells snowmobile engines. The company began operations on July 1 and operated at 100% of capacity during the first month. The following data summarize the results for July: Sales (12,500 units) $1,750,000 Production costs (16,000 units): Direct materials $828,800 Direct labor 398,400 Variable factory overhead 198,400 Fixed factory overhead 132,800 1,558,400 Selling and administrative expenses: Variable selling and administrative expenses $241,600 Fixed selling and administrative expenses 93,500 335,100 If required, round interim per-unit calculations to the nearest cent. a. Prepare an income statement according to the absorption costing concept. Gallatin County Motors Inc. Absorption Costing Income Statement For the Month Ended July 31 Sales V $ 1,750,000 Cost of goods sold X Gross profit Selling and administrative expenses 335,100 Operating incomeb. Prepare an income statement according to the variable costing concept. Gallatin County Motors Inc. Variable Costing Income Statement For the Month Ended July 31 Sales $ 1,750,000 Variable cost of goods sold X Manufacturing margin Variable selling and administrative expenses 241,600 V Contribution margin Fixed costs: Fixed factory overhead costs $ 132,800 Fixed selling and administrative expenses 93,500 Total fixed costs 226,300 Operating incomec. What is the reason for the difference in the amount of operating income reported in {a} and (b)? Under the ' method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under ' ,all of the fixed manufacturing cost is deducted in the period in which it is incurred, regardless of the amount ofinventory change. Thua, when inventory increases, the ' income statement will have a higher operating income