EXERCISE 7-3 (20 MINUTES)

1. Year 1 Year 2 Year 3

Beginning inventories

(units) ... 200 170 180

Ending inventories (units) ... 170 180 220

Change in inventories

(units) ... (30) 10 40

Variable costing net operat-

ing income ... $1,080,400 $1,032,400 $996,400

Add: Fixed manufacturing

overhead cost deferred in

inventory under absorp-

tion costing (10 units ×

$560 per unit; 40 units ×

$560 per unit) ... 5,600 22,400

Deduct: Fixed manufactur-

ing overhead cost re-

leased from inventory un-

der absorption costing (30

units × $560 per unit)... (16,800)

Absorption costing net op-

erating income ... $1,063,600 $1,038,000 $1,018,800