Mercer Company makes leather chairs that it sells for $250 per chair. Each chair requires $36 of direct materials and $85 of direct labor. Fixed overhead costs are expected to be $150,000 per year. Mercer expects to sell 1,500 chairs during the coming year. Selling and administrative expenses were zero.

Required
a. Prepare income statements using absorption costing, assuming that Mercer makes 1,500, 2,000, and 2,500 chairs during the year.
b. Prepare income statements using variable costing, assuming that Mercer makes 1,500, 2,000, and 2,500 chairs during the year.
c. Explain why Mercer may produce income statements under both absorption and variable costing formats. Your answer should include an explanation of the advantages or disadvantages associated with the use of the two reporting formats.