Answer (A) is correct . The contribution margin from manufacturing (sales – variable costs) is $10 ($40 – $30) per unit sold, or $1,200,000 (120,000 units × $10). The fixed costs of manufacturing ($600,000) and selling and administrative costs ($400,000) are deducted from the contribution margin to arrive at an operating income of $200,000. The difference between the absorption income of $440,000 and the $200,000 of variable costing income is attributable to capitalization of the fixed manufacturing costs under the absorption method. Because 40% of the goods produced are still in inventory (80,000 ÷ 200,000), 40% of the $600,000 in fixed costs, or $240,000, was capitalized under the absorption method. That amount was expensed under the variable costing method.
Answer (B) is incorrect because The amount of $440,000 is the operating income under absorption costing.
Answer (C) is incorrect because The amount of $800,000 is the operating income if fixed costs of manufacturing are not deducted.
Answer (D) is incorrect because The amount of $600,000 is the operating income that results from capitalizing 40% of both fixed manufacturing costs and selling and administrative costs.
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