Fixed Costs in Closing Inventory Drive Differences Steps:

• Closing inventory units = 4000 produced - 3500 sold = 500 units.
• Absorption costing values inventory at variable cost + fixed cost per unit; marginal costing uses only variable cost.
• Inventory difference = 500 units × $10 fixed cost per unit =$5000 higher under absorption.
• With production exceeding sales, absorption profit exceeds marginal profit by $5000 (fixed costs deferred in inventory).

Why A is correct:

• Absorption costing absorbs fixed manufacturing costs into unsold inventory per standard costing principles, raising both inventory value and profit by fixed costs on closing stock when output > sales.

Why the others are wrong:

• B: Reverses profit impact; absorption profit is higher, not lower.
• C: Misattributes higher inventory to marginal costing and uses incorrect $500 difference.
• D: Misattributes higher inventory to marginal costing and mismatches profit variance amount.

Final answer: A