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 Diviion had planned to sell 69,630 units during the year, but by September 30 only the following activity had been reported 8 points Units Inventory, January 1 Production Sales Inventory, September 30 72,500 63,300 9,200 eBook The division can rent warehouse space to store up to 29,400 units. The minimum inventory level that the division should carry is 2,900 units. Mr. Cavalas is aware that production must be at least 5,520 units per quarter in order to retain a nucleus of key employees Maximum production capacity is 45,200 units per quarter Print 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, Referencesfixed 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?

Answer 1

1a) Determine the units to be produced during last quarter of the year on assumption that company is using variable costing as below :

Computation of inventory scheduled for last quarter

Particulars

Units

Desired inventory , December 31

2900

Expected sales last qyarter

20100

Total requirement

23000

Less : Inventory , september 30

-9200

Required production

13800

1b) The production units is 13,800

IF the company produces these number of units then inventory cost will be reduced.

inventory cost include cost of carryin inventory, interest cost and perishing loss.

it will ultimately improve net operating income.

2)

Determine the units to be produced to maximize the net operating income :

Particulars

Units

Desired inventory , December 31

29400

Expected sales last qyarter

20100

Total requirement

49500

Less : Inventory , september 30

-9200

Required production

40300

The units to be produced to maximize the net operarting income is 40,300 units