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 68,640 units during the year, but by September 30 only the following activity had been reported:
Units | |
Inventory, January 1 | 0 |
Production | 72,400 |
Sales | 62,400 |
Inventory, September 30 | 10,000 |
The division can rent warehouse space to store up to 30,900 units. The minimum inventory level that the division should carry is 2,400 units. Mr. Cavalas is aware that production must be at least 6,000 units per quarter in order to retain a nucleus of key employees. Maximum production capacity is 45,400 units per quarter.
Demand has been soft, and the sales forecast for the last quarter is only 20,300 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?
1a. Drawing inventory to minimum require the below production:
Desired inventory, December 31 |
2,400 |
Expected sales for the last quarter of the year |
20,300 |
Total units needed for sales and desired EI |
22,700 |
Less: Current inventory on hand -- September30 |
10,000 |
Desired production for the 4th quarter |
12,700 |
This plan will help to reduce the inventory carrying costs such as interest, storage rent, insurance, and obsolescence.
1b. If variable costing is used, the number of units planned for production will not affects the reported net operating income or loss for the year.
All fixed manufacturing overhead cost will be considered as expense of that period irrespective of the units produced. Hence, zero fixed manufacturing overhead cost will be transferred between periods with the inventory account and income will be a function of units sold, rather than number of units produced.
2. Building inventory to the maximum level of 30,900 units would require production as
Desired inventory, December 31 |
30,900 |
Expected sales for the last quarter of the year |
20,300 |
Total units needed |
51,200 |
Less: Current inventory on hand -- September30 |
10,000 |
Required production |
41,200 |
Inroder to maximize the Brazilian Division’s operating income, Mr. Cavalas need to produce many units to maximum of the storage facilities could occupy. And because of building inventory to its maximum, he will be able to defer a portion of current year’s fixed manufacturing overhead costs to future through the inventory account, than any of these costs appear as charges on the CY income statement. So here the required production will be 41,200 for building inventory to the maximum level of 30,900 units.
Carlos Cavalas, the manager of Echo Products’ Brazilian Division, is trying to set the production schedule...
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 68,640 units during the year, but by September 30 only the following activity had been reported: Units Inventory, January 1 0 Production 72,400 Sales 62,400 Inventory, September 30 10,000 The division can rent warehouse space to store up to 30,900 units. The minimum inventory level that the division should carry...
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 69,190 units during the year, but by September 30 only the following activity had been reported: Units Inventory, January 1 0 Production 74,000 Sales 62,900 Inventory, September 30 11,100 The division can rent warehouse space to store up to 29,500 units. The minimum inventory level that the division should carry...
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: Units Inventory, January 1 0 Production 71,500 Sales 61,200 Inventory, September 30 10,300 The division can rent warehouse space to store up to 30,700 units. The minimum inventory level that the division should carry...
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: Units Inventory, January 1 0 Production 71,500 Sales 61,200 Inventory, September 30 10,300 The division can rent warehouse space to store up to 30,700 units. The minimum inventory level that the division should carry...
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...
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...
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...
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...
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?
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 70,070 units...
Chapter 20: Ethical Issue The Southern Division manager of Texcaliber Inc. is growing concerned that the division will not be able to meet its current period income objectives. The division uses absorption costing for internal profit reporting and had an appropriate level of inventory at the beginning of the period. The division manager knows that he can boost profits by increasing production at the end of the period. The increased production will allocate fixed costs over a greater number of...