Ruth Dennis, CEO of Prescott  Industries, is concerned about the recent volatility in the company’s operating income. She believes that  since the number of units sold has been fairly stable over the past three years that operating income also  should have been stable. Ruth asked Jim Randall, Prescott’s inventory manager, to help her understand  the issue.

Jim reviewed the company’s records and compiled the following changes to Finished Goods  Inventory (in units) for the years 2019, 2020, and 2021.

Jim also gathered the 2019 income statements prepared using absorption costing and variable costing,  which follow.

Required

a. Compute the unit product cost for 2019, 2020, and 2021 for variable and absorption costing. Assume  costs do not change from one year to the next.

b. Prepare variable and absorption costing income statements for 2020 and 2021.

c. What do you notice about the trend in operating income from 2019 to 2021 under absorption costing? Compare this trend to the trend in unit sales.

d. Add the operating incomes across the three years for variable costing and absorption costing. What  do you notice about the two totals? Why did this happen?

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Year 2019 2020 2021 Beginning inventory 1,000 2,000 500 Production 40,000 38,000 40,000 Sales (39,000) (39,500) (39,500) Ending inventory 2,000 500 1,000