Suppose you serve on the board of directors of American Faucet, a manufacturer of bathroom fixtures that recently adopted a lean production philosophy. Part of your responsibility is to develop a compensation contract for Toni Moen, the vice president of manufacturing. To give her the incentive to make decisions that will increase the company's profits, the board decides to give Moen a year-end bonus if American Faucet meets a target operating income.
Write a memo to Chairperson of the Board Herbert Kohler explaining whether the bonus contract should be based on absorption costing or variable costing.