Morris Inc. produces an oak rocking chair that is designed to ease back problems. The chairs sell for $400 each. The results of last years operations are as follows:

Units in beginning inventory. 0

Units produced during the year. 40,000

Units sold during the year. 30,000

Units left in ending inventory. 10,000

Variable manufacturing costs per unit.

Direct materials $150

Direct labor 50

Variable manufacturing overhead 25

Variable selling and administrative 20

Total variable cost per unit $245

Fixed costs:

Fixed manufacturing overhead $1,200,000

Fixed selling and administration 1,000,000

Total fixed costs $1,220,000

Required:

1. Determine the unit product cost under absorption costing and variable costing.
2. Prepare an income statement using variable costing.
3. Prepare an income statement using absorption costing.
4. Explain the difference in operating income for the two costing systems.