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Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $24 per unit. Lehighton uses an actual costing system, which means that the actual costs of direct material, direct labor, and manufacturing overhead are entered into work-in-process inventory. The actual application rate for manufacturing overhead is computed each year; actual manufacturing overhead is divided by actual production (in units) to compute the application rate. Information for Lehightons first two years of operation is as follows:

	Year 1			Year 2
Sales (in units)		2,800			2,800
Production (in units)		3,300			2,300
Production costs:
Variable manufacturing costs	$	13,530		$	9,430
Fixed manufacturing overhead		16,830			16,830
Selling and administrative costs:
Variable		11,200			11,200
Fixed		10,200			10,200

Selected information from Lehightons year-end balance sheets for its first two years of operation is as follows:

LEHIGHTON CHALK COMPANY
Selected Balance Sheet Information
Based on absorption costing	End of Year 1			End of Year 2
Finished-goods inventory	$	4,600		$	0
Retained earnings		14,540			26,780
Based on variable costing	End of Year 1			End of Year 2
Finished-goods inventory	$	2,050		$	0
Retained earnings		11,990			26,780

Prepare a numerical reconciliation of the difference in income reported under the two costing methods used in requirements (1) and (2).

	Year Change in Inventory (in units) Actual fixed-overhead rate Difference in fixed overhead expensed Absorption- minus variable-costing operating income 1 Increase or Decrease? 2 Increase or Decrease?

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