VARIABLE COSTING 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 3,600 units during the year, but by September 30 only the following activity had been reported: Units Inventory, January 1 Production 2,400 2,000 Sales 400 Inventory, September 30 The division can rent warehouse space to store up to 1,000 units. The minimum inventory level that the division should carry is 50 units. Mr. Cavalas is aware that production must be at least 200 units per quarter in order to retain a nucleus of key employees. Maximum production capacity is 1,500 units per quarter. Demand has been soft, and the sales forecast for the last quarter is only 600 units. Due to the nature of the division's operations, fixed manufacturing overhead is a major element of product cost. Required: 1. Assume that the division is using variable costing. How many units should be scheduled for production during the last quarter of the year? Will the number of units scheduled for production affect the division's reported income or loss for the year? Explain. 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? 3. Identify the ethical issues involved in the decision Mr. Cavalas must make about the level of production for the last quarter of the year. Note: Write your answers in a piece of paper. Upload your answers in the assigned assignment found in the Schoology.
VARIABLE COSTING 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 3,600 units during the year, but by September 30 only the following activity had been reported: Units Inventory, January 1 Production 2,400 2,000 Sales 400 Inventory, September 30 The division can rent warehouse space to store up to 1,000 units. The minimum inventory level that the division should carry is 50 units. Mr. Cavalas is aware that production must be at least 200 units per quarter in order to retain a nucleus of key employees. Maximum production capacity is 1,500 units per quarter. Demand has been soft, and the sales forecast for the last quarter is only 600 units. Due to the nature of the division's operations, fixed manufacturing overhead is a major element of product cost. Required: 1. Assume that the division is using variable costing. How many units should be scheduled for production during the last quarter of the year? Will the number of units scheduled for production affect the division's reported income or loss for the year? Explain. 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? 3. Identify the ethical issues involved in the decision Mr. Cavalas must make about the level of production for the last quarter of the year. Note: Write your answers in a piece of paper. Upload your answers in the assigned assignment found in the Schoology.
Chapter10: Short-term Decision Making
Section: Chapter Questions
Problem 6PA: Gent Designs requires three units of part A for every unit of Al that it produces. Currently, part A...
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Transcribed Image Text:VARIABLE COSTING
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 3,600 units
during the year, but by September 30 only the following activity had been reported:
Units
Inventory, January 1
2,400
2,000
Production
Sales
400
Inventory, September 30
The division can rent warehouse space to store up to 1,000 units. The minimum inventory level
that the division should carry is 50 units. Mr. Cavalas is aware that production must be at least
200 units per quarter in order to retain a nucleus of key employees. Maximum production
capacity is 1,500 units per quarter.
Demand has been soft, and the sales forecast for the last quarter is only 600 units. Due to the
nature of the division's operations, fixed manufacturing overhead is a major element of product
cost.
Required:
1. Assume that the division is using variable costing. How many units should be scheduled
for production during the last quarter of the year? Will the number of units scheduled
for production affect the division's reported income or loss for the year? Explain.
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?
3. Identify the ethical issues involved in the decision Mr. Cavalas must make about the
level of production for the last quarter of the year.
Note: Write your answers in a piece of paper. Upload your answers in the assigned assignment
found in the Schoology.
e onb er
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