QUESTION #1 Mohandera Corporation manufactures a synthetic element in lieu of engine lubricant. Management was surprised to learn that income before taxes had dropped even though the sales volume had increased. Steps had been taken during the year to improve profitability. The steps included raising the selling price by 12% because of a 10% increase in production costs, and instructing the selling and administrative departments to spend no more this year than last year. Both changes were implemented at the beginning of the year. Mohandera's accounting department prepared and distributed to top management the comparative income statements and related financial information that follow (Mohandera uses the FIFO inventory method for finished goods): MOHANDERA CORPORATION Comparative Statements of Operating Income (in thousands) 2020 Sales revenue $9,000 $11,200 Cost of goods sold 7,200 8,320 Manufacturing volume variance (600) 495 Adjusted cost of goods sold 6,600 8,815 Gross margin 2,400 2,385 Selling and administrative expenses 1,500 1,500 Income before taxes $ 900 $ 885 MOHANDERA CORPORATION Selected Operating and Financial Data 2019 2020 Sales price $ 10.00/kg $ 11.20/kg Material costs 1.50/kg 1.65/kg Direct labour cost 2.50/kg 2.75/kg Variable overhead costs 1.00/kg 1.10/kg Fixed overhead costs 3.00/kg 3.30/kg Total fixed overhead costs 3,000,000 3,300,000 Selling and administrative expenses (all fixed) $1,500,000 $1,500,000 Sales volume 900,000 kg 1,000,000 kg Beginning inventory 300,000 kg 600,000 kg Instructions . a. Explain to management why net income decreased despite the increases in sales price and sales volume. b. It has been proposed that the company use variable costing for its internal reporting. Prepare the variable-costing income statement for 2020. . c. Reconcile the difference in income before taxes using the absorption-costing method currently used by Mohandera Corp and the variable-costing method proposed for 2021