Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $23 per unit. Lehighton uses an actual costing system, which means that the actual costs of direct material, direct labor, and manufacturing overhead are entered into work-in-process inventory. The actual application rate for manufacturing overhead is computed each year; actual manufacturing overhead is divided by actual production (in units) to compute the application rate. Information for Lehighton's first two years of operation is as follows:

Year 1 Year 2

Sales (in units) 2,500 2,500

Production (in units) 3,000 2,000

Production costs:

Variable manufacturing costs $11,400 $7,600

Fixed manufacturing overhead 14,400 14,400

Selling and administrative costs:

Variable 10,000 10,000

Fixed 9,000 9,000

Selected information from Lehighton's year-end balance sheets for its first two years of operation is as follows:

LEHIGHTON CHALK COMPANY

Selected Balance Sheet Information

End of Year 1 End of Year 2

Based on absorption costing

Finished-goods inventory $4,300 $0

Retained earnings 11,500 21,000

Based on variable costing

End of Year 1 End of Year 2

Finished-goods inventory $1,900 $0

Retained earnings 9,100 21,000

Required:

4.Compute the amount by which the year-end balance in finished-goods inventory declined during year 2 (i.e., between December 31 of year 1 and December 31 of year 2):

• Using the data from the balance sheet prepared under absorption costing.
• Using the data from the balance sheet prepared under variable costing.

Amount of decline under absorption costing: __________________

Amount of decline under variable costing: _____________________

5.Refer to your calculations from requirement 4. Compute the difference in the amount by which the year-end balances in finished-goods inventory declined under absorption versus variable costing. Then compare the amount of this difference with the difference in the company's reported operating income for year 2 under absorption versus variable costing.

What is the amount of decline in finished- goods inventory balance during year 2? _______________

What is the reported operating income for year 2 (absorption versus variable costing)? _____________