It is the end of 2007. Ginnungagap Oy began operations in January 2006. The company is so named because it has no variable costs. All its costs are fixed; they do not vary with output.

Ginnungagap is located on the bank of a river and has its own hydro-electric plant to supply power, light and heat. The company manufactures a synthetic fertiliser 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. The following are data regarding the operations of Ginnungagap Oy:

Required
1. Prepare income statements with one column for 2006, one column for 2007 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 stock costs would be carried on the balance sheets at 31 December 2006 and 2007, 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 profit. Which costing method would the manager prefer? Why?

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2006 2007* Sales (units) Production (units) Selling price per tonne C(all fxesl) 10000 20000 10000 E30 280000 280000 40000 40000 Marketing and administrative