Parson Glass Company makes stained glass lamps. Each lamp that it sells for $160 requires $25 of direct materials and $40 of direct labor. Fixed overhead costs are expected to be $90,000 per year. Parson Glass expects to sell 1,000 lamps during the coming year. Selling and administrative expenses were zero.
a. Prepare income statements using absorption costing, assuming that Parson Glass makes 1,000, 1,250, and 1,500 lamps during the year.
b. Prepare income statements using variable costing, assuming that Parson Glass makes 1,000, 1,250, and 1,500 lamps during the year.
c. Explain why Parson Glass may produce income statements under both absorption and variable costing formats. Your answer should include an explanation of the advantages and disadvantages associated with the use of the two reporting formats.