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 67,320 units during the year, but by September 30 only the following activity had been reported: Inventory, January 1 Production Sales Inventory, September 30 Units 0 71,900 61,200 10,700 The division can rent warehouse space to store up to 29,600 units. The minimum inventory level that the division should carry is 2,900 units. Mr. Cavalas is aware that production must be at least 6,420 units per quarter in order to retain a nucleus of key employees. Maximum production capacity is 44,300 units per quarter. Demand has been soft, and the sales forecast for the last quarter is only 19,700 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?

Answer 1

	Brazilian Division is planning to sale 67320 Units
	at end of Sep 30, below status
			Units
	Inventory, Jan
	Production		71,900
	Sales		61,200
	Inventory, Sept		10,700
	Action point
	The division can rent warehouse space upto 29600 Unit
	Maintain Minimum Inventory level== 2900 Unit
	at least Break even Unit Production =6420 Unit per Quarter
	Per Quarter Max production capacity==44300 unit
	Sale Forecast for last Quarter = 19700 Unit
Ans 1a	Variable costing method and determined Closing unit
	Sales Forecast Unit	19700
	Add:
	Maintain Minimum Inventory	2900
	Total Unit	22600
	Less -- Opening Inventory	10,700
	Unit required under variable costing	11,900
	Break even Unit to produced-- 6420 unit
	Total Production unit as calculated 11,900 is higher than Minimum Unti required
	6420 Unit
Ans 1b	Unit of production under variable costing method wil Not IMPACT
	Income Statement ( PNL A/c)
	Variable costing - net Income determined = Revenue - variable cost
	Fixed manfactuirng cost does not depends on Number of Unit Production .
Ans 1c	Under Absorption costing , need to determined Unit position
	Sales Forecast Unit	19700
	Add:
	Unti for Space rent	29600
	Total Unit	49300
	Less -- Opening Inventory	10,700
	Unit required under variable costing	38,600
	Maximum unit production capacity 44300 Unit
	As per above calculation Number of
	unit udner Absorption costing - Unt = 38600 ( Not exceed Max capacity