Chapter 10, Problem 1MC

1.

To determine

Calculate the additional units that would have to be produced.

Explanation of Solution

Calculate the additional units that would have to be produced as follows:

$\begin{array}{c}\begin{array}{l}\text{Additional units }\\ \text{need to produce}\end{array}\}\text{ = }\frac{\text{Fixed factory overhead held back (3)}}{\text{Fixed overhead per unit (4)}}\\ =\frac{\$970,000}{\$11}\\ =88,182\text{ per unit}\end{array}$

Working note (1):

Calculate the variable selling and administrative expense per unit.

$\begin{array}{c}\begin{array}{l}\text{Variable selling and }\\ \text{administraive expense }\\ \text{per unit }\end{array}\}=\left[\frac{\left(\begin{array}{l}\text{Variable selling and }\\ \text{administrative expense}\end{array}\right)}{\text{Available production capactiy}}\right]\\ =\frac{\$2,800,000}{500,000\text{ units}}\\ =\$5.60\text{ per unit}\end{array}$

Working note (2):

Calculate the fixed factory overhead expensed.

Particulars	Amount ($)
Sales $\left(450,000\times \$30\right)$	$13,500,000
Less: Variable manufacturing cost $\left(450,000\times \$5\right)$	$2,250,000
Less: Variable selling and administrative expense $\left(450,000\times \$5.60(W.N.1)\right)$	$2,520,000
Less: Fixed selling and administrative expense	$2,000,000
sub-total	$6,730,000
Less: Target profit	$2,200,000
Fixed factory overhead expensed	$4,530,000

Table (1)

Working note (3):

Calculate the fixed factory overhead held back in inventory to meet profit goal.

$\begin{array}{c}\begin{array}{l}\text{Fixed factory overhead }\\ \text{held back in inventory }\\ \text{to meet profit goal }\end{array}\}\text{= }\left(\begin{array}{l}\text{Total fixed factory overhead}-\\ \text{Fixed factory overhead expensed (2)}\end{array}\right)\\ =\$5,500,000-\$4,530,000\\ =\$970,000\end{array}$

Working note (4):

Calculate the fixed factory overhead per unit.

$\begin{array}{c}\begin{array}{l}\text{Fixed factory }\\ \text{overhead per unit}\end{array}\}\text{ =}\frac{\text{Total fixed overhead}}{\text{Available production capacity }}\\ \text{=}\frac{\$5,500,000}{500,000}\\ \text{=\$11 per unit }\end{array}$

2.

To determine

Prepare an absorption costing income statement and prove the answer in part (1).

Explanation of Solution

Prepare an absorption costing income statement and prove the answer in part (1) as follows:

Company N
Budgeted income statement
For the year ended December 31, 2016
Particulars	Amount ($)	Amount ($)
Sales		$13,500,000
Less: Cost of goods sold
Beginning inventory	$0
Add: Cost of goods manufactured (5)	$8,190,910
Cost of goods available for sales	$8,190,910
Less: Ending inventory (6)	$1,410,910	$6,780,000
Gross margin		$6,720,000
Less: Selling and administrative expenses
Variable selling and administrative expense	$2,520,000
Fixed selling and administrative expense	$2,000,000	$4,520,000
Net income		$2,200,000

Table (1)

Working note (5):

Calcualte the cost of goods manufctured.

Particulars	Amount in ($)
Variable manufacturing costs $\left(450,000\text{ units+88,182 units}\right)\times \$5$	$2,690,910
Add: Fixed manufacturing costs	$5,500,000
Cost of goods manufatured	$8,190,910

Table (1)

Working note (6):

Calcualte the ending inventory.

Particulars	Amount in ($)
Variable manufacturing costs $\left(\text{88,182 units}\right)\times \$5$	$440,910
Add: Fixed costs held back in inventory	$970,000
Cost of goods manufatured	$1,140,910

Table (2)

3.

To determine

Explain the ethical responsibility of person E for the given situation.

Explanation of Solution

Explain the ethical responsibility of person E for the given situation as follows:

All information should be reasonably disclosed based on the expectation of intened users. Producing the additional units would increase the inventory ordering and carrying costs. In this case, person E should not agree to produce additional units,because it may increase the additiaonl bonus. Hence, person E should consult with CEO in order to prevent the additional bonus.

4.

To determine

Explain the bonus plant that would potentially encourages unethical behavior.

Explanation of Solution

Explain the bonus plant that would potentially encourages unethical behavior as follows:

Bonus plan is not based on hitting a certain number, and perhaps the company should consider varying bonus amount depends upon the level of achieved profit.