Variable and Absorption Costing Frances Manufacturing makes only one product with total unit manufacturing costs of $64, of which $36 is variable. No units were on hand at the beginning of 2015. During 2015 and 2016, the only product manufactured was sold for $96 per unit, and the cost structure did not change. Frances uses the first-in, first-out inventory method and has the following production and sales for 2015 and 2016: Units Manufactured Units Sold 2015 100,000 70,000 2016 100,000 120,000

a. Prepare gross profit computations for 2015 and 2016 using absorption costing.

b. Prepare gross profit computations for 2015 and 2016 using variable costing. Do not use negative signs with your answers.

c. Explain how your answers illustrate the impact of differences between production and sales volumes on the gross profits reported each year under absorption and variable costing.

Select the most appropriate statement.

If production volume exceeds sales volume, the absorption costing gross profit will be higher than the variable costing gross profit.

If sales volume exceeds production volume, the absorption costing gross profit will be higher than the variable costing gross profit.

If production volume exceeds sales volume, the variable costing gross profit will be higher than the absorption costing gross profit.

If sales volume exceeds production volume, the variable costing gross profit will be lower than the absorption costing gross profit.