GrynTech Fertilizers began operations in January 2015. The company produces organic fertilizers based on plant-based extracts. It has its own hydroelectric plant to supply power for its production activities. Most of its costs are fixed, allowing the company to have some flexibility in increasing or decreasing its output.

Sales and cost information (remains constant since 2018) regarding the operations of GrynTech Fertilizers are as follows:

RM

Sales price per bag 45.00

Variable manufacturing costs per bag 2.00

Fixed manufacturing overhead costs 280,000

Fixed selling and administrative expenses 90,000

The recent COVID-19 pandemic has forced the company to re-evaluate its production policy. Effective from January 1, 2020, the management decided to produce as much product as was needed to fill sales orders. During 2020, sales were the same as for 2019 and were filled from inventory at the beginning of 2020.

Production and sales (in bags) for 2019:

Production 15,000 bags

Sales 11,000 bags

Required:

a. Explain the relationship between cost structure and profit stability.

(2 marks)

b. Compute the break-even units for GrynTech Fertilizers.

(2 marks)

c. Prepare a Statement of Profit and Loss for GrynTech Fertilizers for the year of 2019 and 2020 using:

i. absorption costing

ii. variable costing.

(12 marks)

d. Refer to your answers in Requirement (c). Reconcile the net operating income reported under absorption and variable costing methods for each year. Explain your answers. (5 marks)

e. In GrynTech Fertilizers, the performance of managers is evaluated and rewarded largely on the basis of reported absorption operating income. The new production policy announcement has created strong dissatisfaction at the plant, especially the production manager. In your opinion, why did the production manager express his frustration with the new policy? Please include an Islamic perspective in your answer.