Absorption and variable costing Wheaton Manufacturing pays its production managers a bonus based on the company’s profitability.

During the two most recent years, the company maintained the same cost structure to manufacture its products.

Wheaton’s sales revenue for both years was $280,000.
Required

a. Prepare income statements based on absorption costing for the years 2005 and 2006.

b. Since Wheaton sold the same amount in 2005 and 2006, why did net income increase in 2006?

c. Discuss management’s possible motivation for increasing production in 2006.

d. Determine the costs of ending inventory for 2006. Comment on the risks and costs associated with the accumulation of inventory.

e. Based on your answers to Requirements b and

c, suggest a different income statement format and prepare income statements for 2005 and 2006 using your suggested format.