The Garrard Company manufacturestrendy, high-quality, moderately priced watches. As Garrard's senior financialanalyst, you are asked to recommend a method of inventory costing. The CFO will use your recommendation to prepare Garrard's 2018 statement of comprehensive income. The following data are for the year ended December31, 2018.

Beginning inventory, January 1, 2018

88,000

units

Ending inventory, December 31, 2018

34,000

units

2018 sales

293,000

units

Selling price (to distributor)

$

20.00

per unit

Variable manufacturing cost per unit, including direct materials

$

5.70

per unit

Variable operating (marketing) cost per unit sold

$

1.60

per unit sold

Fixed manufacturing costs

$

1,165,600

Denominator-level machine-hours

6,200

Standard production rate

40

units per machine-hour

Fixed operating (marketing) costs

$

1,050,000

PrintDone

Assume standard costs per unit are the same for units in beginning inventory and units produced during the year.Also, assume noprice, rate, or efficiency variances. Anyproduction-volume variance is written off to COGS in the month in which it occurs.

1.

Prepare statements of comprehensive income under variable and absorption costing for the year ended December31, 2018.

2.

What is Garrard's operating income as a percentage of revenues under each costingmethod?

3.

Explain the difference in operating income between the two methods.

4.

Which costing method would you recommend to theCFO? Why?