Managerial Accounting
17th Edition
ISBN: 9781260247787
Author: Ray H. Garrison, Eric W. Noreen, Peter C. Brewer
Publisher: RENT MCG
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Chapter 6, Problem 27P
| PROBLEM 6-27 Incentives Created by Absorption Costing; Ethics and the Manager LO6-2 |
| 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 | 0 | |||
| Production | 2,400 | |||
| Sales | 2,400 | |||
| Inventory, September 30 | 400 |
| 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 |
Required:
| Assume that the division is using variable costing. How many units should be scheduled for production during the last quarter of the year? (The basic formula for computing the required production for the quarter is: Required production = Expected sales - Desired ending inventory - Beginning inventory). Show computations and explain your answer. Will the number of units scheduled for production affect the division's reported income or loss for the year? Explain. |
| 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 quarter9 [See the formula in (1) above. Explain. |
| Identify the ethical issues involved in the decision Mr. Cavalas must make about the level of production for the last quarter of the year. |
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Students have asked these similar questions
Question 5.1
Stark and Company would like to evaluate one of the product lines that they sell to the defense
department. Every month the Stark and Company produce an identical number of units, although the
sales in units differ from month to month.
Selling price
Units in beginning inventory
$105
110
Units produced
6,400
Units sold
6,100
Units in ending inventory
Variable costs per unit:
410
Direct materials
$62
Direct labour
$48
Variable manufacturing overhead
Variable selling and administrative
Fixed costs:
$3
$7
Fixed manufacturing overhead
Fixed selling and administrative
$64,000
$35,600
Submission Instructions:
1. Under variable costing, identify the unit product cost for the month.
2. What is the unit product cost for the month under absorption costing?
3. Prepare an income statement for the month using the contribution format and the
variable costing method.
4. Prepare an income statement for the month using the absorption costing method.
QUESTION 7
Quiet Corp. currently makes 2000 subcomponents a year in one of its factories. The unit costs to produce are:
Description
Per unit
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
$4
4
2
IMI
An outside supplier has offered to provide Quiet Corp. with the 2000 subcomponents at a $17 per unit price. Fixed overhead is not avoidable. If Quiet Corp. decides to
buy from the outside supplier, the impact to net income will be ?
If positive, enter the number, if negative, place a-sign before your number
QUESTION 4
Exxarro Llimited is considering pricing and costing for the year ahead. The following data based on expected
production and sales of 15 000 units are provided for analysis:
Variable manufacturing cost
Fixed manufacturing cost
R1 185 000
R510 000
R5 per unit sold
R130 000
Sales commission
Fixed administration cost
Sales
R210 per unit
Study the information provided above and answer the following questions independently:
4.1 Calculate the break-even sales value.
4.2 Calculate the sales volume required to achieve a profit of R 800 000.
4.3 Suppose Exxaro Limited is considering a decrease of 10% per unit in the selling price of the product with the
expectation that it would increase sales volume by 10%. Is this a good idea? Motivate your answer with relevant
calculations.
Chapter 6 Solutions
Managerial Accounting
Ch. 6.A - Prob. 1ECh. 6.A - EXERCISE 6A-2 Super-Variable Costing and Variable...Ch. 6.A - Prob. 3ECh. 6.A - PROBLEM 6A-4 Super-Variable Costing and Variable...Ch. 6.A - Prob. 5PCh. 6 - Prob. 1QCh. 6 - Are selling and administrative expenses treated as...Ch. 6 - Explain how fixed manufacturing overhead costs are...Ch. 6 - What are the arguments in favor of treating fixed...Ch. 6 - What are the arguments in favor of treating fixed...
Ch. 6 - Prob. 6QCh. 6 - Prob. 7QCh. 6 - Prob. 8QCh. 6 - Under absorption costing, how is it possible to...Ch. 6 - Prob. 10QCh. 6 - Prob. 11QCh. 6 - What costs are assigned to a segment under the...Ch. 6 - Distinguish between a trace able fixed cost and a...Ch. 6 - Explain how the contribution margin differs from...Ch. 6 - Prob. 15QCh. 6 - Prob. 16QCh. 6 - Should a company allocate its common feed costs to...Ch. 6 - A B C D E 1 Chapter 6: Applying Excel 2 3 Data 4...Ch. 6 - A B C D E 1 Chapter 6: Applying Excel 2 3 Data 4...Ch. 6 - A B C D E
1 Chapter 6: Applying...Ch. 6 - Diego Company manufactures one product that is...Ch. 6 - Prob. 2F15Ch. 6 - Prob. 3F15Ch. 6 - Prob. 4F15Ch. 6 - Prob. 5F15Ch. 6 - Diego Company manufactures one product that is...Ch. 6 - Prob. 7F15Ch. 6 - Prob. 8F15Ch. 6 - Prob. 9F15Ch. 6 - Prob. 10F15Ch. 6 - Prob. 11F15Ch. 6 - Prob. 12F15Ch. 6 - Prob. 13F15Ch. 6 - Diego Company manufactures one product that is...Ch. 6 - Prob. 15F15Ch. 6 - Prob. 1ECh. 6 - Prob. 2ECh. 6 - Prob. 3ECh. 6 - Prob. 4ECh. 6 - Prob. 5ECh. 6 - EXERCISE 6-6 Variable and Absorption Costing Unit...Ch. 6 - Prob. 7ECh. 6 - Prob. 8ECh. 6 - EXERCISE 6-9 Variable and Absorption Costing Unit...Ch. 6 - Prob. 10ECh. 6 - Prob. 11ECh. 6 - Prob. 12ECh. 6 - Prob. 13ECh. 6 - Prob. 14ECh. 6 - EXERCISE 6—15 Absorption Costing Unit Product Cost...Ch. 6 - EXERCISE 6-16 Working with a Segmented Income...Ch. 6 - Prob. 17ECh. 6 - Prob. 18PCh. 6 - Prob. 19PCh. 6 - Prob. 20PCh. 6 - PROBLEM 6—21 Segment Reporting and Decision-Making...Ch. 6 - Prob. 22PCh. 6 - Prob. 23PCh. 6 - PROBLEM 6-24 Companywide and Segment Break-Even...Ch. 6 - Prob. 25PCh. 6 - Prob. 26PCh. 6 - PROBLEM 6-27 Incentives Created by Absorption...Ch. 6 - Prob. 28PCh. 6 - Prob. 29CCh. 6 - Prob. 30C
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