Question

It is December 15 and Jane Jones, the plant manager at Acme Electric Fan Co., faces a difficult decision. The operation has been running steadily over the last 11 months. During that time, Jane worked with the production engineers to tweak the production machinery just enough to allow for a small increase in available capacity. The plant produced 18,000 fans between January and the end of November and is scheduled to produce 2,000 fans in the month of December. The sales manager indicates that all 20,000 fans will be sold by the end of the year. Jane realizes the extra investment in engineering costs will allow the plant to produce an extra 500 fans in December. Cost and pricing information are provided below:

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Variable costs per unit:
Raw material	$         3
Direct labour	$         2
Variable production costs	$         1
Variable selling expenses	$         1
Fixed manufacturing costs	$ 61,500
Beginning inventory	–0–
Selling price per unit	$       12

Inventory holding costs are negligible, and customers have been known to place unexpected special orders that are typically difficult to fill. Jane figures a small safety stock of 500 fans would provide a cushion against future special orders. Even so, Jane is torn about the decision to produce the 500 additional fans. Her performance is evaluated mainly by the profit generated by the plant. In addition, her year-end bonus is based on profitability of the plant. Jane is worried that incurring the extra costs will have a negative effect on plant profitability.

Required:

Take on the role of the plant accountant and provide Jane with the analysis she needs to make an informed decision. Assuming the company utilizes absorption costing, analyze the effect of producing the additional 500 fans on plant profitability and on Jane’s bonus, and recommend a course of action.

Answer 1