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Chamiching makes hacksaw blades. Inventory values are determined using the first in, first out (FIFO) method. Production and sales data for the first three years

Chamiching makes hacksaw blades. Inventory values are determined using the first in, first out (FIFO) method. Production and sales data for the first three years appear below.

Hacksaw blades

Sold

Produced

Yr 1

18,000

22,000

Yr 2

25,000

23,000

Yr 3

37,000

35,000

Sales price

Full cost

Yr 1

$10.00

$6.00

Yr 2

$11.00

$6.60

Yr 3

$12.00

$7.60

In the first year, variable costs accounted for half of the full costs. Total fixed production costs increased each subsequent year by 20%, as a result of step-fixed costs and a general inflationary price increase.

For Chamiching, which of the following is true?

(a)The company should always choose absorption costing as it shows increasing profits every year

(b)The company should always choose absorption costing because it facilitates income smoothing

(c)Over the three years, Chamiching accumulates the same total income regardless of the choice of inventory costing method

(d) b and c only

(e) a, b and c

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