Vernon Manufacturing pays its production managers a bonus based on the companys profitability. During the two most recent years, the company maintained the same cost structure to manufacture its products.

Year	Units Produced			Units Sold
Production and Sales
Year 2		4,000			4,000
Year 3		6,000			4,000
Cost Data
Direct materials				$	14.90	per unit
Direct labor				$	23.30	per unit
Manufacturing overheadvariable				$	10.30	per unit
Manufacturing overheadfixed				$	106,200
Variable selling and administrative expenses				$	8.60	per unit sold
Fixed selling and administrative expenses				$	50,000

(Assume that selling and administrative expenses are associated with goods sold.)

Vernon sells its products for $109.30 per unit.

Required

1. Prepare income statements based on absorption costing for Year 2 and Year 3.

2. Since Vernon sold the same number of units in Year 2 and Year 3, why did net income increase in Year 3?

4. Determine the costs of ending inventory for Year 3.

5. Prepare income statements based on variable costing for Year 2 and Year 3.