"There must be something wrong with these statements!" exclaimed Hugh Richards, president of Ajax Inc. "They just don't make sense. We sold the same number of units this year as we did last year, yet our profits have tripled! Who messed up the calculations?" Ajax Inc. is a medium-sized supplier of plastic components to the automobile industry and has been in business for 25 years. Sales forecasting has been relatively easy to do in the past since Ajax has had long-term, single-sourcing relationships with most of its customers. In 2020, however, there was a threat of a strike at one of Ajax Inc.'s major raw materials suppliers. For that reason, Ajax management decided to purchase more raw materials and produce more components in 2020 than actually required, in anticipation of raw materials shortages in 2021. Manufacturing equipment was typically operated below capacity, so this boost in production was possible without incurring significant increased fixed manufacturing costs. The income statement and production reports to which Richards was referring are shown below: Sales (40,000 units each year) Cost of goods sold Gross margin Selling & administrative expenses Operating income 2019 S 1.250,000 840,000 410,000 350,000 60,000 2020 S 1.250,000 720,000 530,000 350,000 180,000 Sales (40.000 units each year) Cost of goods sold Gross margin Selling & administrative expenses Operating income 2019 $ 1,250,000 840,000 410,000 350,000 60,000 2020 $ 1,250,000 720.000 530,000 350,000 180,000 Production in units Sales in units Variable manufacturing cost per unit produced Variable selling and administrative expense per unit sold Fixed manufacturing overhead costs (total) 2019 40,000 40,000 S6 S2 S 600,000 2020 50,000 40,000 S6 S2 S 600,000 Ajax Inc. uses absorption costing and applies fixed manufacturing overhead costs to its only product on the basis of each year's production + B 7 IC = = :: SEX 4.1 5 6 7 8 9 10 11 12 13 14 15 16 17 Take on the role of the CFO of Ajax Inc. Write a memo to Richards to explain why the operating income for 2020 was higher than for 2019 under absorption costing, although the same number of units was sold in each year. Make sure to include the following: 1. A contribution format income statement for each year, using variable costing. Be sure to reconcile the variable costing and absorption costing operating income figures for each year