Scott Higgins, the new Plant Manager of Old City Manufacturing Plant Number 7. has just reviewed a draft of his year-end financial statements. Higgins receives a year-end bonus of 7.5% of the plant's operating income before tax. The year-end income statement provided by the plant's controller was disappointing to say the least. After reviewing the numbers. Higgins demanded that his controller go back and "work the numbers" again Higgins insisted that if he didn't see a better operating income number the next time around he would be forced to look for a new controller. Old City Manufacturing classifies all costs directly related to the manufacturing of its product as product costs. These costs are inventoried and later expensed as costs of goods sold when the product is sold. All other expenses, including finished goods warehousing costs of $3.875.000 are classified as period expenses. Hewitt had suggested that warehousing costs be included as product costs because they are