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9-34 Variable costing and absorption costing, the Evergreen All-Fixed Corporation. (R. Marple, adapted) It is the end of 2020. Evergreen All-Fixed Corporation began operations in January 2019. The company is so named because it has no variable costs. All its costs are fixed; they do not vary with output.

Evergreen All-Fixed Corp. 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 pressing a few buttons on a keyboard.

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

2019	2020a
Sales	27,000 tons	27,000 tons
Production	54,000 tons	0 tons
Selling price	$125 per ton	$125 per ton
Costs (all fixed):
Manufacturing	$2,700,000	$2,700,000
Operating (nonmanufacturing)	$ 103,000	$ 103,000

^a Management adopted the policy, effective January 1, 2020, of producing only as much product as needed to fill sales orders. During 2020, sales were the same as for 2019 and were filled entirely from inventory at the start of 2020.

Prepare income statements with one column for 2019, one column for 2020, and one column for the 2 years together using (a) variable costing and (b) absorption costing.

What is the breakeven point under (a) variable costing and (b) absorption costing?

What inventory costs would be carried in the balance sheet on December 31, 2019 and 2020 under each method?

Assume that the performance of the top manager of Evergreen All-Fixed is evaluated and rewarded largely on the basis of reported operating income. Which costing method would the manager prefer? Why?

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