Nyssa Inc., a manufacturer of agricultural equipment, is heading towards financial distress. Managements bonuses are determined based on net income relative to budget. Nyssa experienced a recent change in management, in early 2021. The new manager was surprised to discover that the outgoing manager had sharply increased 2020 production, resulting in excessive levels of inventory on hand at the end of 2020. Nyssa uses absorption costing for its inventories.

Required

a. Why did the previous management increase production and inventories?

b. How might managements compensation plan be changed to reduce the likelihood that this would happen in the future?