The Zwatch Company manufactures trendy, high-quality, moderately priced watches. As

Zwatch'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 Zwatch's

2020 income statement. The following data are for the year ended December 31, 2020

Data Table:

Beginning inventory, January 1, 2020

82,000 units

Ending inventory, December 31, 2020

31,000 units

2020 sales

315,000 units

Selling price (to distributor)

$20.50 per unit

Variable manufacturing cost per unit, including direct materials

$5.00 per unit

Variable operating (marketing) cost per unit sold

$1.10 per unit sold

Fixed manufacturing costs

$1,188,000

Denominator-level machine-hours

5,400

Standard production rate

50 units per machine-hour

Fixed operating (marketing) costs

$1,030,000

Assumptions:

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. pop-up content ends

Requirements:

1.

Prepare income statements under variable and absorption costing for the year ended December 31,2020.

2.

What is Zwatch'soperating 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?