Brown Boot Company Income statement December 31, 20X2-20X4 (20X5 budget) 20X2 20X3 20X4 20X5 budget Volume produced (pairs) 1,275,000 1,250,000 1,250,000 1,200,000 Volume sold (pairs) 1,274,500 1,225,000 1, 197,500 1,175,000 Selling price per pair $ 97.15 $ 97.15 $ 96.60 $ 96.50 (all figures in '000s) Total revenue $ 123,818 $ 119,009 $ 115,679 $ 113,388 Cost of goods sold (Schedule 1) 81.829 87.443 85.929 78.216 Gross margin $ 41,989 $ 31,566 $ 29,750 $ 35,172 Variable selling and administrative expense $ 7,429 $ 5,950 $ 8,098 $ 7,937 Fixed selling and administrative expense 18.789 17.685 17.035 17.035 Total expenses 26.218 23.635 25,133 24.972 Surplus (deficit) 15,771 7,931 4,617 10,200, Brown Boot Company Schedule of cost of goods sold December 31, 20X2-20X4 (20X5 budget) (in $'000s) 20X2 20X3 20X4 20X5 budget Units Cost Units Cost Units Cost Units Cost Beginning finished goods inventory 20,000 1,302 20,500 1,316 45,500 3,253 98,000 7,033 Add: Manufactured (Schedule 2) 1,275,000 81,843 1,250,000 89,380 1,250,000 89,709 1,200,000 79,312 Available for sale 1,295,000 83,145 1,270,500 90,696 1,295,500 92,962 1,298,000 86,345 Deduct: Ending finished goods inventory 20,500 1,316 45,500 3,253 98,000 7,033 123,000 8,129 Cost of goods sold 1,274,500 81,829 1,225,000 87,443 1,197,500 85,929 1,175,000 78,216 Note: For clarity, units are shown in full while costs are shown in '000s.Brown Boot Company Schedule of cost of goods manufactured December 31. 20X2-20X4 {20x5 budget) (in $'000s) 2015 201:2 20:0! 2014 budget Direct materials used $ 47,239 $ 50,715 $ 46,736 $ 43.992 Direct labour 22.504 25.340 23.1 35 22,308 Overhead applied' Variable overhead applied $ 1446 $ 3.200 $ 9,100 $ 7.392 Fixed overhead applied $ 4,054 $ 5.125 $ 5,633 $ 5,620 Total manufacturing overhead costs applied $ 12,100 $ 13.325 $ 14,733 $ 13,012 Total cost of goods manufactured2 $ 01,343 $ 89.300 $ 09,?09 $ 79.312 1 BBC uses rst in, rst out inventory costing and a normal costing system to apply overhead to inventory. Dver- or underapplied overhead is negligible. 2 Beginning and ending work-in-prccess inventory is not considered because the difference between beginning and ending balances is negligible. The cost of goods sold schedule shows a buildup of product that is putting a strain on the warehouse. The operations manager has noted that word from the marketing team is that the company needs to produce to increase the bottom line and keep unit costs low. Required: a) Using the information provided, prepare a variable costing income statement that incorporates the cost of goods sold for years 20X3 and 20x4 (in \"0005). Assume for variable costing that the opening inventory for 20X3 is $1,241,000. [0 marks) b) Prepare a reconciliation of the differences in absorption costing and variable costing incomes for both years (2 marks). Explain the following: [3 marks} - What effect will building ending inventory balances have on prot? e What reason might the marketing manager have for increasing inventory levels? Provide numerical data to support the reason. e What are the ethical issues that management needs to address, if any