RGB Corporation is a manufacturer of a synthetic element. A. B. Meek, president of the company, has been eager to obtain the operating results for the fiscal year just completed. Meek was surprised when the income statement revealed that operating income dropped to $645,000 from $900,000, although sales volume had increased by 100,000 units. This drop in operating income occurred even though Meek had implemented the following changes during the past 12 months to improve the profitability of the company.
(1) In response to a 10% increase in production costs, the sales price of the company's product was increased by 12%. This action took place on December 1, 20A.
(2) The management of the Selling and Administrative Departments were given strict instructions to spend no more in fiscal 20B than they did in fiscal 20A.
RGB's accountants prepared the following schedule of selected data to assist management. The company's comparative income statement also appears below. RGB uses the fifo method for finished goods.

Required:
(1) Explain to A. B. Meek why RGB Corporation's net income decreased in the current fiscal year, despite the sales price and sales volume increase.
(2) A member of RGB's Accounting Department has suggested that the company adopt direct costing for internal reporting purposes.
(a) Prepare an operating income statement for the fiscal years ended November 30, 20A and 20B, for RGB Corporation using the direct costing method.
(b) Present a numerical reconciliation of the difference in operating income between the absorption costing method currently in use and the direct costing method proposed.
(3) Identify and discuss some of the advantages and disadvantages of using the direct costing method for internal reporting purposes.

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RGB Corporation Selected Operating and Financial Data For 20A and 20B 20A 20B $11.20 1.65 2.75 1.10 3.30 $3,000,000 $3.,300,000 .n1,500,000 1,500,000 1,000,000 1000,000 850,000 900,000 1.000,000 0 300,000 300,000 150,000 $10.00 1.50 2.50 1.00 3.00 Sales price per unit. Materials cost per unit. Direct labor cost per unit Variable factory overhead per unit.. Fixed factory overhead per unit Total fixed factory overhead.tn Total selling and administrative expenses Quantity of units budgeted (normal capacity) Quantity of units actually produced Quantity of units sold... Quantity of units in beginning inventory... Quantity of units in ending inventory.. 1.200.000 RGB Corporation Statements of Operating Income For the Year Ending November 30, 20A and 20B (in thousands) 20A 20B $11,200 Sales revenue Cost of goods sold Volume variance, (favorable) unfavorable Gross profit Selling and administrative expenses.... Operating income $9,000 $7,200 (600) $8,560 6,600 $2,400 495 9055 $ 2,145 S900 645