The Zwatch Company manufactures trendy, high-quality moderately priced watches. As Zwatchs senior financial analyst, you are asked to recommend a method of inventory costing. The CFO will use your recommendation to construct Zwatchs 2022 income statement. The following data are for the year ended December 31, 2022:

Beginning inventory, January 1, 2022, 85,000 units

No of units Produced 294,900 units

Ending inventory, December 31, 2022, 34,500 units

Sales 345,400 units

Selling price (to distributor) $22.00 per unit

Variable manufacturing cost per unit, incl. DM $5.10 per unit

Variable selling and admin cost per unit sold $1.10 per unit sold.

Fixed MOH $4.80 per unit

Fixed selling and admin costs $1,080,000

1. Prepare income statements under contribution and absorption costing for the year ended December 31, 2022. (10 marks)

2.Explain the difference in operating income between the two methods. (2 marks)