1. (35 points) Everest Inc. manufactures a single product. Its executive team received the following information, representing the actual numbers for the year so far:

Revenues	$7,500,000
Selling price per unit	$250
Variable manufacturing overhead costs per unit produced	22
Total fixed manufacturing overhead per year	2,100,000
Direct materials per unit produced	53
Direct labor per unit produced	25
Variable selling & administration expense per unit sold	32
Total fixed selling & administration expense per year	720,000

The company management team is promised a considerable bonus if a GAAP earnings target of $1,100,000 is met. No further sales are possible during the year, the company started the year with no inventory, and currently has 5,000 units in its inventory. The companys controller proposes to produce even more units for the inventory to meet the earnings target.

Note: GAAP requires the use of absorption costing.

1. What is GAAP earnings at the current point?
2. What is variable-costing earnings at the current point?
3. How many additional units would need to be produced for the inventory to exactly meet the GAAP earnings target?
4. How many units should be in the ending inventory?
5. What would be the value of the ending inventory under absorption costing?
6. What would be the value of the ending inventory under variable costing?
7. Would the controllers proposal make sense if the bonus were based on variable-costing earnings rather than GAAP earnings?
8. Why does GAAP require the use of absorption costing?