Ethics and Creating Profits Through Accounting Methods. The vicepresident of sales, Dorey Rosen, gives the bad news to J. R. Wagoner, the vicepresident of production: "Our sales volume will be 20 percent less than the 400,000 units we produced and sold last year. So, we may as well forget about year-end bonuses."

Wagoner smiles and replies, "We'll just pump the inventories up by producing 500,000 units. There is plenty of storage area in the warehouse."

"We'll never get away with it. The president will see what we are doing," Rosen answers.

"No, he knows nothing about accounting. Let me handle it, and we'll still get our bonuses."

A summary manufacturing income statement for last year is given as follows:

Product cost for last year included fixed manufacturing overhead of \(\$ 20\) per unit. Unit variable costs and total fixed costs are expected to remain the same next year. The company uses a FIFO cost flow.
\section*{Required:}
1. How is Wagoner planning to build up the profits?
2. Prepare an estimated income statement for this year assuming that Rosen's estimate of sales is correct and that 500,000 units of product are manufactured. Use absorption costing.
3. Recast the last year's manufacturing income statement and the estimated statement for this year on a variable costing basis.
4. Discuss whether J. R. Wagoner is behaving in an ethical manner.

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Net sales Cost of goods sold: Inventory, January 1. Production cost Cost of merchandise available for sale. Less inventory, December 31 Cost of goods sold... Income from manufacturing $18,000,000 $ 175,000 14,000,000 $14,175,000 175,000 $14,000,000 $ 4,000,000