Tracy Manufacturing pays its production managers a bonus based on the company’s profitability. During the two most recent years, the company maintained the same cost structure to manufacture its products.

(Assume that selling and administrative expenses are associated with goods sold.)
Tracy’s sales revenue for both years was $345,000.

a. Prepare income statements based on absorption costing for the years 2014 and 2015.
b. Since Tracy sold the same amount in 2014 and 2015, why did net income increase in 2015?
c. Discuss management’s possible motivation for increasing production in 2015.
d. Determine the costs of ending inventory for 2015. Comment on the risks and costs associated with the accumulation of inventory.
e. Based on your answers to Requirements b and c, suggest a different income statement format and prepare income statements for 2014 and 2015 using your suggestedformat.

  • CreatedFebruary 07, 2014
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