Question

Horizon Press produces textbooks for high school accounting courses The company recently hired a new editor Jaden Green to handle production and sales of books for an introduction to accounting cours Jader's compensation depends on the gross margin associated with sales of this book Jaden needs to decide how many copies of the book to produce the following information is for the fall Semester 2017 (Click the icon to view the information) Jaden has decided to produce either 29,000, 37,700 or 43,500 books 1 More Info - X Requirements Estimated sales 20,000 books Beginning inventory O books Average selling price 61 per book Variable production costs $ 45 per book Fored production costs 5 522,000 per semester The fixed cost location rate is based on expected sales and is therefore equal to $522 000/20 000 books 518 per book 1. Calculate expected gross margini Jaden produces 29,000, 37,700, of 43,500 books (Make sure you include the production-volume variance as part of cost of goods sold ) 2. Calculate ending inventory in units and in dollars for each production level 3. Managers who are paid a bonus that is a function of gross margin may be inspired to produce a produce of demand to maximize their own bonus There are metrics to discourage managers from producing products EXCESS of demand Do you think the following metrics w o mplish this objective Show your work a incorporate a charge of 15% of the cost of the ending inventory as an expense for evaluating the man b. Include nonfinancial measures when evaluating management and rewarding performance Print Done Print Done 29,000 books 37 700 books 43 500 books

Answer 1

Horizon Press Requirement 1 29000 Books 2349000 1827000 Revenues Cost of goods sold Production-volume variance Net cost of goods sold Gross Margin 37700 Books 3053700 1827000 -156600 1670400 1383300 43500 Books 3523500 1827000 -261000 1566000 1957500 1827000 522000 Cost per unit = ($45 + $522,000/29,000 books sold) = $63 per book COGS = $63 x 29,000 = $1,827,000 volume variance = Budgeted fixed cost-fixed overhead rate x production $522,000 -($18 x 29,000 books) = $0 volume variance = Budgeted fixed cost-fixed overhead rate x production $522,000 -($18 x 37,700 books) = $156,600 volume variance = Budgeted fixed cost-fixed overhead rate production $522,000 -($18 x 43,500 books) = -$261,000 Requirement 2 29000 Books 37700 Books 43500 Books Beginning inventory Production 43500 29000 29000 29000 37700 37700 29001 8699 43500 29002 14498 Books sold Ending inventory Cost per book Cost of Ending Inventory 63 548037 913374

Requirement 3a 29000 Books 522000 Gross margin Less 15% x Ending inventory Adjusted gross margin 37700 Books 1383300 -82206 1301094.45 43500 Books 1957500 -137006 1820493.9 522000 While adjusting for ending inventory does to some degree mitigate the increase in inventory associated with excess production, it may be difficult to mechanically compensate for all of the increased income. In addition, it does nothing to hold the manager responsible for the poor decisions from the organization's standpoint. Requirement 3b 43500 29000 Books 37700 Books Books 8699 14498 1) Inventory change: End inventory - begin inventory 2) Excess production (%) Production + sales 29000/29000 37000/29000 43500/29000 1.30 1.50 • A ratio of ending inventory to beginning inventory, as suggested in the book, is not possible because beginning inventory was zero, so we substituted change in inventory level.