E. All of these.
Reasons for Carrying Inventory are following:
• To balance ordering or setup costs and carrying costs.
• To satisfy customer demand (e.g., meet delivery dates).
• To avoid shutting down manufacturing facilities because of:
• Machine failure
• Defective parts.
• Unavailable parts.
• To buffer against unreliable production processes.
• To take advantage of discounts.
• To hedge against future price increases.
In Absorption costing, fixed factory overhead is treated as a product cost. Unit product cost consists of direct materials, direct labor, variable factory overhead, and fixed factory overhead.
In Variable costing, fixed factory overhead is treated as a period expense. Unit product cost under variable costing consists of direct materials, direct labor, and variable factory overhead.
Table showing difference between Absorption costing and Variable costing
C. Overall operating income will decrease by $25,000.
Operating income under variable costing: