Several managers who were reluctant to lose their year-end bonuses approached Michael and suggested that the company could still show a profit of $4,800,000. The managers argued that, at the present rate of sales, there was enough capacity to produce tens of thousands of additional CD-ROM drives for the warehouse. Overtime costs might have to be incurred, but all of this additional cost would be assigned to the CD-ROM drives in ending inventory. .
1. If sales are 200,000 units for the year and the selling price and cost structure remain the same, how many units would have to be produced to show a profit of at least $4,800,000 under absorption costing? (Round answer up to the nearest whole unit).
ANSWER: 221,053 CD-ROM drives would have to be produced to meet a target profit of $4,800,000.
2. Verify your answer to this by constructing an income statement. Use the absorption costing method.
Exhibit 2. Hunter Electronics -- Budgeted Income StatementAbsorption Method.
Sales (200,000 units) $ 40,000,000.
Cost of Goods Sold .
Beginning Inventory $0 .
Costs of Goods Sold (221,053 Units at $148 each) $32,715,830 .
Goods Available For Sale $32,715,83 .
Less Ending Inventory $3,115,843 $29,599,987.
Gross Margin $10,400,013.
Less Selling and Admin Expense .
Variable Selling and Administration $2,000,000 .
Fixed Selling and Administration $3,600,000 $5,600,000.
Net Operating Income $4,800,013.
3. Do you think Michael Lee should approve the plan to build ending inventories in order to attain the target profit?.
ANSWER: No, see memo.
4. What advise would you give the board of directors concerning how they determine bonuses in the future?.
ANSWER: See memo.
.
INTEROFFICE MEMORANDUM.
TO: PROFESSOR WILLIAM MCGARVEY, CHAIRMAN - BOARD OF DIRECTORS.
FROM: MICHAEL LEE.
SUBJECT: PERFORMANCE BONUS RECOMMENDATION - HUNTER ELECTRONICS.
DATE: 5/17/2003.
At the onset of budget planning activities for this past fiscal year, the board of directors indicated that the budget was not as ambitious as hoped and that they would like to set and meet "stretch goals- related to profit.
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