Darwin 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.
Year _________________________________________Units Produced _____Units Sold
Production and Sales
2018..................................................................... 6,000.................. 6,000
2019..................................................................... 8,000.................. 6,000
Cost Data
Direct materials..................................................................... $4 per unit
Direct labor......................................................................... $6 per unit
Manufacturing overhead-variable............................................. $2 per unit
Manufacturing overhead-fixed.......................................... $36,000
Variable selling and administrative expenses........................... $2 per unit sold
Fixed selling and administrative expenses............................... $15,000
(Assume that selling and administrative expenses are associated with goods sold.)
Darwin's sales revenue for both years was $172,500.
Required
a. Prepare income statements based on absorption costing for the years 2018 and 2019.
b. Since Darwin sold the same amount in 2018 and 2019, why did net income increase in 2019?
c. Discuss management's possible motivation for increasing production in 2019.
d. Determine the costs of ending inventory for 2019. 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 2018 and 2019 using your suggested format.