Absorption and variable costing Thornell 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 & administrative expenses are associated with goods sold.) Thornell sells its products for $108 a unit.
Required
a. Prepare income statements based on absorption costing for 2011 and 2012.
b. Since Thornell sold the same number of units in 2011 and 2012, why did net income increase in 2012?
c. Discuss management's possible motivation for increasing production in 2012.
d. Determine the costs of ending inventory for 2012. 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. Prepare income statements for 2011 and 2012 using your suggested format.

Year Units Produced Units Sold Production and Sales 4,000 2011 4,000 2012 6,000 4,000 Cost Data Direct materials Direct labor $15 per unit $24 per unit $12 per unit $108,000 $9 per unit sold $60,000 Manufacturing overhead-variable Manufacturing overhead-fixed Variable selling and administrative expenses Fixed selling and administrative expenses