Chapter 9, Problem 9.38P

Motivational considerations in denominator-level capacity selection (continuation of 9-37).

1. 1. If the plan manager of the Jacksonville Brewery gets a bonus based on operating income, which denominator-level capacity concept would he prefer to use? Explain.

Required

1. 2. What denominator-level capacity concept would Castle Lager prefer to use for U S. income-tax reporting? Explain.
2. 3. How might the IRS limit the flexibility of an absorption-costing company like Castle Lager attempting to minimize its taxable income?

9-31 Variable and absorption costing and breakeven points. Camino, a leading firm in the sports industry, produces basketballs for the consumer market. For the year ended December 31, 2017, Camino sold 400,0 basketballs at an average selling price of $12 per unit. The following information also relates to 2017 (assume constant unit costs and no variances of any kind):

Inventory, January 1, 2017:	0 basketballs
Inventory, December 31, 2017:	20,000 basketballs
Fixed manufacturing costs:	$380,000
Fixed administrative costs:	$660,000
Direct materials costs:	$ 3 per basketball
Direct labor costs:	$ 4 per basketball

1. 1. Calculate the breakeven point (in basketballs sold) in 2017 under:
   1. a. Variable costing
   2. b. Absorption costing
2. 2. Suppose direct materials costs were $4 per basketball instead. Assuming all other data are the same, calculate the minimum number of basketballs Camino must have sold in 2017 to attain a target operating income of $120,000 under:
   1. a. Variable costing
   2. b. Absorption costing