Chapter 21, Problem 1EI

Sampson Company operates a manufacturing facility where several products are made. Each product is considered a business segment, and the product managers have the opportunity to receive a bonus based on the profit of the segment. Franco Hopper is the manager for the scissors product line. Production and sales data for the scissors product line for the past three years are shown below:

Hopper’s bonus is 0.5% of the gross profit of the scissors product line, based on absorption costing. Upper management is discussing changing the bonus system so that bonuses are based on operating income using variable costing. Hopper is opposed to this change and has been trying to convince the other product mangers to join him in voicing their opposition. There are no beginning inventories in Year 1.

Requirements

1. 1. Calculate the fixed cost per unit produced for each year.
2. 2. Prepare income statements for the three years using absorption costing.
3. 3. Calculate Hopper’s bonus based on the current plan.
4. 4. Prepare income statements for the three years using variable costing.
5. 5. Calculate Hopper’s bonus based on the proposed plan.
6. 6. Give possible reasons why Hopper is opposed to the proposed bonus plan. Do you think Hopper’s actions have been ethical the past three years? Why or why not?