EXERCISE 7-9 (20 MINUTES)

1. A higher proportion of fixed costs will increase the disparity between ab-

sorption unit product costs and the costs reported under variable cost-

ing. This will also have the effect of magnifying fluctuations in net oper-

ating income that occur under absorption costing as a consequence of

changes in inventories. (See the discussion in part 2 below.)

Proponents of absorption costing will make the same arguments as

before, as will the proponents of variable costing. However, the higher

proportion of fixed costs will increase the differences between reports

based on variable costing and those based on absorption costing. Con-

sequently, this issue becomes more important as the proportion of fixed

costs in the cost structure increases.