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 69,850 units during the year, but by September 30 only the following activity had been reported: Units Inventory, January 1 Production Sales Inventory, September 30 73,400 63,500 9,900 The division can rent warehouse space to store up to 30,700 units. The minimum inventory level that the division should carry is 2,300 units. Mr. Cavalas is aware that production must be at least 5,940 units per quarter in order to retain a nucleus of key employees. Maximum production capacity is 45,700 units per quarter. Demand has been soft, and the sales forecast for the last quarter is only 20,900 units. Due to the nature of the division's operations, fixed manufacturing overhead is a major element of product cost. Required: 1-a. Assume that the division is using variable costing. How many units should be scheduled for production during the last quarter of the year? Required production units 1-b. Will the number of units scheduled for production affect the division's reported income or loss for the year? Yes No 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? Required production units

Answer 1

Answer
1a.		units
	Desired ending inventory	2300 [ minimum]
	Add sales	20900
	Less Beginning inventory on September 30	9900
	Production during quarter	13300
	13300 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
	Hence Number of units produced will not affect reported income or loss.
2	. If division is using absorption costing-
	Desired ending inventory	30700 [maximum storage capacity]
	Add sales	20900
	Less Beginning inventory on September 30	9900
	Production during quarter	41,700 units
	39300units should be scheduled to production to maximize profit under absorption costing.
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