In Problem 9-31, Castle Lager has just purchased the Jacksonville Brewery. The brewery is two years old and uses absorption costing. It will “sell” its product to Castle Lager at $ 47 per barrel. Peter Bryant, Castle Lager’s controller, obtains the following information about Jacksonville Brewery’s capacity and budgeted fixed manufacturing costs for 2014:
1. If the plant manager of the Jacksonville Brewery gets a bonus based on operating income, which denominator-level capacity concept would he prefer to use? Explain.
2. What denominator-level capacity concept would Castle Lager prefer to use for U. S. income-tax reporting? Explain.
3. How might the IRS limit the flexibility of an absorption-costing company like Castle Lager attempting to minimize its taxable income?