Absorption and variable costing Xavier 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.

(Assume that selling & administrative expenses are associated with goods sold.)
Xavier sells its products for $72 a unit.
Required

a. Prepare income statements based on absorption costing for 2006 and 2007.

b. Since Xavier sold the same number of units in 2006 and 2007, why did net income increase in 2007?

c. Discuss management’s possible motivation for increasing production in 2007.

d. Determine the costs of ending inventory for 2007. 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. Prepare income statements for 2006 and 2007 using your suggested format.