Estimated sales 15,000 books Beginning inventory 0 books Average selling price $81 per book Variable production...

Estimated sales	15,000	books
Beginning inventory	0	books
Average selling price	$81	per book
Variable production costs	$54	per book
Fixed production costs	$225,000	per semester

The fixed cost allocation rate is based on expected sales and is therefore equal to

$ 225,000/15,000 books =$ 15 per book.

Managers who are paid a bonus that is a function of gross margin may be inspired to produce a product in excess of demand to maximize their own bonus. There are metrics to discourage managers from producing products in excess of demand. Do you think the following metrics will accomplish this objective? Show your work.

a. Incorporate a charge of 5% of the cost of the ending inventory as an expense for evaluating the manager. (Complete all answer boxes. For a $0 change, make sure to enter "0" in the appropriate cell.) Please show formulas for solving

	15,000 books	21,000 books	31,500 books
Gross margin
Ending inventory charge
Adjusted gross margin

Expert Solution

	15,000 books	21,000 books	31,500 books
Gross margin (Requirement 1)	$ 1,80,000.00	$ 2,70,000.00	$ 4,27,500.00
Ending inventory charge (Requirement 2)	$ -	$ 4,14,000.00	$ 11,38,500.00
Adjusted gross margin (Requirement 3)	$ 1,80,000.00	$ 2,49,300.00	$ 3,70,575.00
Adjusting for ending inventory Does to some degree mitigate the increase in inventory associated with excess production. Therefore, it may be Difficult to mechanically compensate for all of the increased income. In addition, it does nothing to hold the manager responsible for the poor decisions from the organization's standpoint.

Requirement 1
	15,000 Books	21,000 Books	31,500 Books
Revenues (15000 x $81 per book)	$ 12,15,000.00	$ 12,15,000.00	$ 12,15,000.00
Cost of goods sold (15000 x ($54+ $15)	$ 10,35,000.00	$ 10,35,000.00	$ 10,35,000.00
Production - volume variance (U/F?)	$ -	$ -90,000.00	$ -2,47,500.00
	N	F	F
Net Cost of Goods Sold	$ 10,35,000.00	$ 9,45,000.00	$ 7,87,500.00
Gross Margin	$ 1,80,000.00	$ 2,70,000.00	$ 4,27,500.00
Production Volume variance = Budgeted fixed cost – fixed overhead rate × production
Production Volume variance (15000) = $225000 - ($15 x 15000)	0	N
Production Volume variance (21000) = $225000 - ($15x 21000)	-90000	F
Production Volume variance (31500) = $225000 - ($15 x 31500)	-247500	F

Requirement 2: Calculate ending inventory in units and in dollars for each production level.
Requirement 2	15,000 Books	21,000 Books	31,500 Books
Beginning Inventory	0	0	0
Production	15000	21000	31500
Sales	15000	15000	15000
Ending Inventory	0	6000	16500
Cost Per Book (54+ 15)	69	69	69
Cost of Ending Inventory	0	414000	1138500

Requirement 3: Managers who are paid a bonus that is a function of gross margin may be inspired to produce a product in excess of demand to maximize their own bonus. There are metrics to discourage managers from producing products in excess of demand. Do you think the following metrics will accomplish this objective? Show your work.
a. Incorporate a charge of 5% of the cost of the ending inventory as an expense for evaluating the manager.	15,000 Books	21,000 Books	31,500 Books
Gross Margin	$ 1,80,000.00	$ 2,70,000.00	$ 4,27,500.00
Ending inventory charge	$ -	$ (20,700.00)	$ (56,925.00)
Adjusted gross margin	$ 1,80,000.00	$ 2,49,300.00	$ 3,70,575.00

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