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Consider the following information: Q1 Q2 Q3 Beginning inventory (units) 0 800 600 Budgeted units to be produced 60,000 60,000 60,000 Actual units produced 61,000 59,500 60,800 Units sold 60,200 59,700 60,800 Variable manufacturing costs per unit produced $60 $60 $60 Variable selling costs per unit sold $20 $20 $20 Fixed manufacturing costs $3,000,000 $3,000,000 $3,000,000 Fixed selling costs $900,000 $900,000 $900,000 Selling price per unit $180 $180 $180 There are no price, efficiency, or spending variances, and any production-volume variance is directly written off to cost of goods in the quarter in which it occurs. a) Prepare income statements for Q1, Q2, and Q3 using variable costing and absorption costing. b) Explain the differences in operating income between the two costing systems for each quarter. Be specific! Question #2 a) Under which inventory costing method would managers have an incentive to build excess inventory? What is it about that method that provides the incentive? Be sure to justify your answer. b) What steps can a manager take to reduce the incentive to build excess inventory? Be specific! Question #3 a) How does the choice of the denominator level capacity impact income reported under variable costing? Be sure to justify your answer. b) How does the choice of the denominator level capacity impact income reported under full absorption costing? Be sure to justify your answer.

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