The following questions involve the same manufacturing company in two different sets of circumstances. In both, the cost structure of the company is constant from year to year. Selling prices, unit variable costs, and total fixed costs are the same in every year. However, unit sales and/or unit production levels may vary from year to year.

Required:

1. Consider the following data for scenario A:

a. Were unit sales constant from year to year? Explain.
b. What was the relationship between unit sales and unit production levels in each year? For each year, indicate whether inventories grew or shrank.
2. Consider the following data for scenario B:

a. Were unit sales constant from year to year? Explain.
b. What was the relationship between unit sales and unit production levels in each year? For each year, indicate whether inventories grew or shrank.
3. Given the patterns of operating income in scenarios A and B above, which costing method, variable costing or absorption costing, do you believe provides a better reflection of economic reality? Explain.

Year 1 Year 2 Year 3 Variable costing operating income.. Absorption costing operating income.. $16,847 $16,847 $29,378 $16,847 $6,018 $16,847