Elevate, a new manufacturer in 2022, assembles and sells unique and stylish hats. Elevates 2022 absorption costing income statement (assuming a LIFO cost flow assumption) is provided below. In 2022, Elevate produced 30,000 units, but sold only 20,000 units. During 2022, Elevate incurred $600,000 of Fixed Manufacturing Overhead cost, $200,000 of Fixed Selling and Administrative cost, variable production costs (Direct Materials, Direct Labor, and Variable Manufacturing Overhead) of $25 per unit produced, and Variable Selling and Administrative costs of $10 per unit sold. 2022 Sales $1,400,000 -Cost of Goods Sold $900,000 Gross Profit $500,000 -Selling, General and Administrative Exp. $400,000 Operating Income (Loss) $100,000

Required:

1. Assume that Elevate used Absorption Costing and a last-in, first-out (LIFO) inventory cost flow assumption in both 2022 and 2023. a. Compute the product cost per unit produced for Elevate in 2022. b. Assume the selling price and cost structure remain the same in 2023 as it was in 2022. Prepare an absorption costing income statement for 2023. Assume also that Elevate produced 20,000 units and sold 30,000 units in 2023.

Required:

2. Assume, for this question only, that Elevate uses variable costing and a last-in, first-out (LIFO) inventory cost flow assumption in 2022. a. Compute the product cost per unit produced in 2022. b. Prepare a variable costing income statement for 2022.

Required: 3. Reconcile the 2022 operating income values between absorption (see given information above) costing and variable (see your answer to question 2b) costing using the following formula: FMOH in ending inventory under absorption costing FMOH in beginning inventory under absorption costing = absorption costing operating income - variable costing operating income. Note that a little rounding error (should be less than a few dollars) is ok.

Required: 4. Without performing any calculations, state whether 2023 variable costing operating income will be higher, lower, or the same as the absorption costing operating income level in 2023 (see answer to question 1b and given data in 1b), and thoroughly explain why.

Required: 5. Are lower level managers of manufacturers that evaluate managers based on absorption costing profits incentivized to overproduce? Thoroughly explain why or why not?