The Foundational 15
1. and 2.

The unit product costs under variable costing and absorption costing are computed as follows:

| Variable Costing | Absorption Costing | Direct materials | $24 | $24 | Direct labor | 14 | 14 | Variable manufacturing overhead | 2 | 2 | Fixed manufacturing overhead
($800,000 ÷ 40,000 units) | — | 20 | Unit product cost | $40 | $60 |

3. and 4.

The total contribution margin and net operating income under variable costing are computed as follows:

Sales | | $2,800,000 | Variable expenses: | | | Variable cost of goods sold | | | (35,000 units × $40 per unit) | $1,400,000 | | Variable selling and administrative
(35,000 units × $4 per unit) | 140,000 | 1,540,000 | Contribution margin | | 1,260,000 | Fixed expenses: | | | Fixed manufacturing overhead | 800,000 | | Fixed selling and administrative | 496,000 | 1,296,000 | Net operating loss | | $ (36,000) |

The Foundational 15 (continued)

5. and 6.

The total gross margin and net operating income under absorption costing are computed as follows:

Sales (35,000 units × $80 per unit) | $2,800,000 | Cost of goods sold (35,000 units × $60 per unit) | 2,100,000 | Gross margin | 700,000 | Selling and administrative expenses
[(35,000 units × $4 per unit) + $496,000] | 636,000 | Net operating income | $ 64,000 |

7. The difference between the absorption and variable costing net operating incomes is explained as follows:

Variable costing net operating income | $(36,000) | Add fixed manufacturing overhead cost deferred in inventory under absorption costing* | 100,000 | Absorption costing net operating income | $ 64,000 |

* The fixed manufacturing overhead deferred in inventory is computed as follows: 5,000 units ×