Problem $19-3$A $($Algo$)$ Income reporting, absorption costing, and managerial ethics LO C$1$

Blazer Chemical produces and sells an ice$-$melting granular used on roadways and sidewalks in winter. It annually produces and sells $20,875$ tons of its granular. Because of this year$$s mild winter, projected demand for its product is only $16,700$ tons. Based on projected production and sales of $16,700$ tons, the company estimates the following income using absorption costing.

Sales $(16,700$ tons at $$80$ per ton$)$ $ $1,336,000$

Cost of goods sold $(16,700$ tons at $$60$ per ton$)1,002,000$

Gross profit $334,000$

Selling and administrative expenses $334,000$

Income $ $0$

Its product cost per ton follows and consists mainly of fixed overhead because its automated production process uses expensive equipment.

Direct materials $ $13$ per ton

Direct labor $ $4$ per ton

Variable overhead $ $3$ per ton

Fixed overhead $($$$668,000/16,700$ tons$)$ $ $40$ per ton

Selling and administrative expenses consist of variable selling and administrative expenses of $$6$ per ton and fixed selling and administrative expenses of $$233,800$ per year. The company$$s president will not earn a bonus unless a positive income is reported. The controller mentions that because the company has large storage capacity, it can report a positive income by setting production at the usual $20,875$ ton level even though it expects to sell only $16,700$ tons. The president is surprised that the company can report income by producing more without increasing sales.

Required:

Prepare an income statement using absorption costing based on production of $20,875$ tons and sales of $16,700$ tons. Can the company report a positive income by increasing production to $20,875$ tons and storing the $4,175$ tons of excess production in inventory?

By how much does income increase by when producing $20,875$ tons and storing $4,175$ tons in inventory compared to only producing $16,700$ tons?