Absorption versus variable costing Alvarez Company makes leather chairs that it sells for $200 per chair. Each chair requires $28 of direct materials and $72 of direct labor. Fixed overhead costs are expected to be $120,000 per year. Alvarez 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 Alvarez makes 1,500, 2,000, and 2,500 chairs during the year.

b. Prepare income statements using variable costing, assuming that Alvarez makes 1,500, 2,000, and 2,500 chairs during the year.

c. Explain why Alvarez may produce income statements under both absorption and variable costing formats. Y our answer should include an explanation of the advantages or disadvantages associated with the use of the two reporting formats.