As companies automate their operations with advanced manufacturing technology and information technology, cost structures are becoming more fixed with higher proportions of overhead. Keep this trend in mind, when answering the questions below.

1. Excluding inflation and changes in the selling prices of products, how could a company with the same sales as last year report significantly higher profits without cutting any costs on their absorption income statement? Explain.

2. Could the reverse situation occur? That is, could lower accounting profits be reported on the absorption income statement, even though the company is not economically worse-off? Explain.

3. Most companies evaluate and compensate top management, in part, on the basis of net operating income. Would top management have a preference for basing its evaluations on variable costing or absorption costing? Explain.