Question

Walker Boat Company produces bass boats. The following comments were found in the “Management’s Discussion and Analysis” section of the annual report’s.

“Bass boat production includes a significant amount of robotic manufacturing costs, which do not vary with production levels."

a. What effect would the change in the level of boats produced have on the total robotic costs?

b.What effect would the change in the level of boats produced have on the unit costs of the boats?

c. From the external reporting pt of view, how would your answer to (b) possibly lead to unethical behavior by management anxious to produce a better bottom-line this period? (Note that Cost of Goods Sold, an expense item on the Income Statement, is a function of units SOLD, not produced).

Answer 1

Solution.

a. Robotic manufacturing costs, do not vary with production levels, hence  change in the level of boats produced have no impact on the total robotic costs.

b. With increase in level of production, unit cost of the boats will significantly reduced, as other cost such as material, labour are variable cost, but robotic cost will remain same with any level of production.

c. Cost of Goods Sold, an expense item on the Income Statement, is a function of units SOLD, not produced will lead to unethical behavior by management anxious to produce a better bottom-line this period, as robotic cost which does not vary with level of production will not fully charged to income statement.