1. Jennings Corporations income statement for Year 2 (that is, the second year of the companys existence) based on FIFO and absorption costing is as follows:

Sales	$405,000
Cost of Goods Sold Expense	$251,000
Gross Margin	$164,000
Marketing Expenses	$ 83,000
Administrative Expenses	$ 49,600
Operating Income	$ 31,200

The ending balance for the work-in-process inventory account is $0 at the end of Year 1 and Year 2. The ending balance of the finished goods inventory account in Year 1 and Year 2 are $22,000 and $86,000 respectively. At the end of Year 2, the finished goods inventory consists only of units produced in Year 2.

40 percent of the manufacturing costs incurred in Year 1 are variable, and 70 percent of the manufacturing costs incurred in Year 2 are variable. Also, 80 percent of marketing expenses and 40 percent of administrative expenses are considered variable

Question:

1. Suppose Jennings Corporation is considering switching to a type of variable costing system, in which all fixed costs (both manufacturing and selling and administrative costs) are treated as period costs. Prepare an income statement for Year 2 using variable costing.

2. Explain why the company could be experiencing a cash flow shortage despite the adequate income shown in its income statement based on FIFO and absorption costing.

3. What is the impact on inventory levels if the manager is evaluated on operating income based on FIFO and absorption costing? Are there circumstances in which you would recommend the manager be evaluated in this manner?