Your company uses absorption costing for preparing its GAAP-based income statement and balance sheet. Management is disappointed because its external auditors are requiring it to write off an inventory amount because because the inventory balance exceeds what the company could reasonably sell in the foreseeable future.

1. Discuss what might have motivated managers to produce more than they could sell. Support your contention with a numerical example of how they might benefit.

2. Assuming managers receive a bonus based on profit, why would management be disappointed about the write-off?

3. Are their ethical considerations?