Variable costing and absorption costing, The All-Fixed Company. (R. Marple, adapted) ©

It is the end of 2010. The All-Fixed Company began operations in January 2009. The com- | (,) Operating income for pany is so named because it has no variable costs. All its costs are fixed. 2009, ($20,000)

All-Fixed 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 hired on a fixed annual salary. The output of the plant can be increased or decreased by adjusting a few dials on a control panel.

Management adopted the policy effective January 1, 2010, of producing only as much product as was needed to fill sales orders. During 2010, sales were the same as 2009 and were filled entirely from beginning inventory at the start of 2010.

REQUIRED 1. Prepare income statements with one column for 2009, one column for 2010, 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 on the balance sheets at December 31, 2009, and 2010, 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?LO1

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The following are data regarding the operations of The All-Fixed Company: 2009 2010 Sales (tonnes) 10,000 10,000 Production (tonnes) 20,000 0 Selling price per tonne $30 $30 Costs (all fixed): Manufacturing $280,000 $280,000 Marketing and administrative $40,000 $40,000