Campbell Manufacturing Company $($CMC$)$ was started when it acquired $$80,000$ by issuing common stock. During the first year of

operations, the company incurred specifically identifiable product costs $($materials$,$ labor, and overhead$)$ amounting to $$75,000.$ CMC also

incurred $$60,000$ of engineering design and planning costs. There was a debate regarding how the design and planning costs should be

classified. Advocates of Option $1$ believe that the costs should be classified as general, selling, and administrative costs. Advocates of

Option $2$ believe it is more appropriate to classify the design and planning costs as product costs. During the year, CMC made $5,000$ units

of product and sold $4,000$ units at a price of $$35$ each. All transactions were cash transactions.

Required

a$.$ Prepare a GAAP$-$based income statement and balance sheet under each of the two options.

b$.$ Identify the option that results in financial statements that are more likely to leave a favorable impression on investors and creditors.

c$.$ Assume that CMC provides an incentive bonus to the company president equal to $20$ percent of net income. Compute the amount of the

bonus under each of the two options. Identify the option that provides the president with the higher bonus.

d$.$ Assume a $30$ percent income tax rate. Determine the amount of income tax expense under each of the two options. Identify the option

that minimizes the amount of the company's income tax expense.

e$.$ Comment on the conflict of interest between the company president as determined in Requirement $c$ and the owners of the company as

indicated in Requirement $d.$ Describe an incentive compensation plan that would avoid a conflict of interest between the president and

the owners.