The Garrard Company manufactures trendy, high-quality, moderately priced watches. As Garrard's senior financial analyst, you are asked to recommend a method of inventory costing. The chief financial officer (CFO) will use your recommendation to prepare Garrard's 2020 income statement. The following data are for the year ended December 31, 2020:

Beginning inventory, January 1, 2020 80,000 units

Ending inventory, December 31, 2020 31,000 units

2020 sales 330,000 units

Selling price (to distributor) $20.50 per unit

Variable manufacturing cost per unit, including DM $5.70 per unit

Variable operating (marketing) cost per unit sold $1.80 per unit sold

Fixed manufacturing costs $1,247,000

Denominator-level machine-hours 5,800

Standard production rate 50 units per machine-hour

Fixed operating (marketing) costs $1,060,000

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.

1.	Prepare income statements under variable and absorption costing for the year ended December 31, 2020.
2.	What is Garrard's operating income as percentage of revenues under each costing method?
3.	Explain the difference in operating income between the two methods.
4.	Which costing method would you recommend to the CFO? Why?