Cloverton Glass Company makes stained glass lamps. Each lamp that it sells for $128 requires $20 of direct materials and $32 of direct labor. Fixed overhead costs are expected to be $72,000 per year. Cloverton Glass expects to sell 1,000 lamps during the coming year. Selling and administrative expenses were zero.
Required
a. Prepare income statements using absorption costing, assuming that Cloverton Glass makes 1,000, 1,250, and 1,500 lamps during the year.
b. Prepare income statements using variable costing, assuming that Cloverton Glass makes 1,000, 1,250, and 1,500 lamps during the year.
c. Explain why Cloverton 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.