Conceptual: Variable versus absorption costing (LO2). A strong dollar coupled with weak demand has put price pressure on the products of Ajax Corporation, which makes power supplies. Ryan Wilson, the...

Conceptual: Variable versus absorption costing (LO2). A strong dollar coupled with weak demand has put price pressure on the products of Ajax Corporation, which makes power supplies. Ryan Wilson, the firm’s CEO, is under intense pressure to meet this year’s profit target. Ajax’s accountant suggested that putting the units made into inventory would increase current period profit more than if Ajax were to sell these units. Ryan’s confusion arises because he cannot fathom how producing and storing a product can be more profitable than selling the product.

Required:

Explain the key condition that is necessary for the accountant’s logic to make sense (Hint: Suppose Ajax inventoried 100 units instead of selling them. Decompose the change in profit into a change in contribution margin and the change in other items.)