Suppose you serve on the board of directors of Canadian 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 Canadian 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. Use the following format:

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Date: To: From: Subject: