Question

Carlos Cavalas, the manager of Echo Products Brazilian Division, is trying to set the production schedule for the last quarter of the year. The Brazilian Division had planned to sell 69,520 units during the year, but by September 30 only the following activity had been reported: Units Inventory, January 1 Production Sales Inventory, September 30 72,200 63,200 9,000 The division can rent warehouse space to store up to 30,600 units. The minimum inventory level that the division should carry is 1,900 units. Mr. Cavalas is aware that production must be at least 5,400 units per quarter in order to retain a nucleus of key employees. Maximum production capacity is 44,600 units per quarter. Demand has been soft, and the sales forecast for the last quarter is only 20,100 units. Due to the nature of the division's operations fixed manufacturing overhead is a major element of product cost. Required: 1a. Assume that the division is using variable costing. How many units should be scheduled for production during the last quarter of the year? 1b. Will the number of units scheduled for production affect the division's reported income or loss for the year 2. Assume that the division is using absorption costing and that the divisional manager is given an annual bonus based on divisional operating income if Mr. Cavalas wants to maximize his division's operating income for the year, how many units should be scheduled for production during the last quarter? < Prev 5 of 6 !!! Score answer >

Answer 1

1a.as the demand has been soft Brazilian division should minimize the production.As a result minimum inventory level should be maintained.

	units
Desired ending inventory	1,900 [ minimum]
Add sales	20,100
Less Beginning inventory on September 30	9,000
Production during quarter [1,900+20,100-9,000]	13,000

13,000 units should be scheduled for last quarter.

1b.

In variable costing, fixed costs are treated as PERIOD COSTS. They are constant and number of units produced during the period does not affect this cost.Income is calculated on the basis of number of units sold and not number of units produced.

Hence Number of units produced will not affect reported income or loss.

2.

absorption costing does not consider fixed cost as period cost. They are absorbed into profit and loss statement on the basis of units produced. the remaining cost is added to the value of inventory.Higher the inventory value more is the profit.Brazilian division manager will maximize the profit by keeping maximum number of units in inventory.This way Mr.Cavalas would be able to defer fixed manufacturing overhead costs to future years through the inventory account.

Desired ending inventory	30,600[maximum storage capacity]
Add sales	20,100
Less Beginning inventory on September 30	9,000
Production during quarter [30,600+20,100-9,000]	41,700 units

41,700 units should be scheduled to production to maximize profit under absorption costing.