R. Marple, adapted) It is the end of 2007. The All-Fixed Company began operations in January 2006. The company is so named because it has no variable costs. All its costs are fixed; they do not vary with output.

The All-Fixed Company is located on the bank of a river and has its own hydroelectric plant to supply power, light, and heat. The company manufactures a synthetic fertilizer from air and river water and sells its product at a price that is not expected to change. It has a small staff of employees, all paid fixed annual salaries. The output of the plant can be increased or decreased by adjusting a few dials on a control panel.

The following budgeted and actual data are for the operations of the All-Fixed Company. All-Fixed uses budgeted production as the denominator level and writes off any production-volume variance to cost of goods sold.

*Management adopted the policy, effective January 1,2007, of producing only as much product as needed to fill sales orders. During 2007, sales were the same as for 2006 and were filled entirely from inventory at the start of 2007.
Required
1. Prepare income statements with one column for 2006, one column for 2007, and one column for the two years together, using (a) variable costing and (b) absorption costing.
2. What is the breakeven point under (a) variable costing and (b) absorption costing?
3. What inventory costs would be carried in the balance sheet on December 31, 2006 and 2007, under each method?
4. Assume that the performance of the top manager of the company is evaluated and rewarded largely on the basis of reported operating income. Which costing method would the manager prefer? Why?

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2007a 10,000 tons $30 per ton $280,000 2006 Sales Production Selling price Costs (all fixed): 10,000 tons 20,000 tons $30 per ton 0 tons Manufacturing Operating $280,000 $ 40,000 $40,000