The Zwatch Company manufactures trendy, high quality, moderately pricedwatches. As Zwatchs senior financial analyst, you are asked to recommend a methodof inventory costing. The CFO will use your recommendation to prepare Zwatchs 2019 income statement. The following data are for the year ended December 31, 2019:

Beginning inventory, January 1, 2019 100,000 units Ending inventory, December 31, 2019 50,000 units 2019 sales 400,000 units Selling price (to distributor) $25 per unit Variable manufacturing cost per unit, including direct materials $6 per unit Variable operating (marketing) cost per unit sold $2 per unit sold Fixed manufacturing costs $1,625,000 Denominator-level machine-hours 6,500 Standard production rate 50 units per machine-hour Fixed operating (marketing) costs $1,100,000 Assume standard costs per unit are the same for units in beginning inventory and unitsproduced during the year. Also, assume no price, spending, or efficiency variances. Anyproduction-volume variance is written off to cost of goods sold in the month in which itoccurs.

1. Prepare income statements under variable and absorption costing forthe year ended December 31, 2019. 2. What is Zwatchs operating income as percentage of revenues under eachcosting method? 3. Explain the difference in operating income between the two methods. 4. Which costing method would you recommend to the CFO? Why?