In: Accounting
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 |
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 |