Hammond Tire Manufacturing produces truck tires. Current market conditions indicate a significant increase in demand in 2009 for their tires. In anticipation of that increase, the CEO has ordered the production plants to increase production by 25% in 2008. Since sales are projected to remain stable in 2008, that will result in a 25% increase in inventory levels by the end of 2008.

Required
Discuss the impact on operating income in 2008 using variable and absorption costing. What causes the difference? Hammond Tire is required to provide the bank with financial statements at the end of each year. What do you think the bank will think of the 2008 income statement? If the market projections prevail and sales increase by 25% in 2009, what will be the impact on the 2009 income statement using both costing methods?