4 (CONTINUED) PART 2

Exercise 7-4 (continued)

Part 2:

Year 1 Year 2 Year 3 Year 4

Beginning inventory... 6,000 2,000 1,775 5,463

Production ... 18,000 20,775 22,688 20,936

Sales... 22,000 21,000 19,000 20,000

Ending ... 2,000 1,775 5,463 6,399

Variable costing net

operating income .. $770,600 $640,600 $380,600 $510,600

Fixed manufacturing

overhead in begin-

ning inventory*... $326,455 $159,600 $122,745 $345,890

overhead in ending

inventory... $159,600 $122,745 $345,890 $439,035

Absorption costing net

operating income .. $603,745 $603,745 $603,745 $603,745

* Fixed manufacturing overhead in beginning inventory is assumed in both

parts 1 and 2 for Year 1. A FIFO inventory flow assumption is used.

© The McGraw-Hill Companies, Inc., 2006. All rights reserved.

Solutions Manual, Chapter 7 355