Authentic Arts, Ltd. produces several different kits to make dreamweavers. Last year, the company produced 30,000 kits and sold all but 2,000 kits. The kits sell for $15 each. Costs incurred are listed here:

Materials purchased........................................$ 55,000

Materials used....................................................45,000

Other variable production costs..........................30,000

Fixed production costs........................................50,000

Variable selling costs.............................................6,000

Fixed selling and administrative costs.................30,000

Beginning inventory last year held 2,000 kits. Assume that under variable costing the value of this inventory would have been $5,000. Assume that under absorption costing the value of this inventory would have been $9,000. Authentic Arts uses a FIFO cost flow assumption.

Required:

A. If Authentic Arts uses variable costing, what was its operating income? What was the ending balance in finished goods inventory?

B. If Authentic Arts uses throughput costing, what was its operating income? What was the ending balance in finished goods inventory?

C. If Authentic Arts uses absorption costing and a denominator level of 25,000, what was its operating income?

D. If you were asked to make a recommendation for the absorption costing denominator level for next period’s operations, what would you suggest? Explain your choice.

E. If the manager of Authentic Arts is given a bonus based on income, which type of income statement would you recommend for evaluating manager performance? Explain your choice.