[Jack]

Our inventory has increased:

Absorption Costing: Inventory increased by $8400

Marginal Costing: Inventory increased by $4800

Difference: $3600

This $3600, is the fixed overhead that has been absorbed into the inventory under Absorption Costing. This will also be the difference in profits between the two costing methods.

When we use absorption costing, some of the fixed costs for the period are held within the inventory that has been created which reduces the cost of sales and gives us a higher profit.

Absorption Costing Profit is 45000 – 3600 = $41,400 (A)

Increased inventory – > absorption costing profits > marginal costing profits
Decreased Inventory -> marginal costing profits > absorption costing profits

[Jack]

I think it is

B – Regressive.

The tax hits poorer households proportionally more, as their income rises they probably don’t use much more heating and so pay less tax relative to their income.

[Author]

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