Carlos Cavalas, the manager of Echo Products’ Brazilian Division, is trying to s
ID: 2415713 • Letter: C
Question
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 65,340 units during the year, but by September 30 only the following activity had been reported:
The division can rent warehouse space to store up to 29,800 units. The minimum inventory level that the division should carry is 1,800 units. Mr. Cavalas is aware that production must be at least 8,280 units per quarter in order to retain a nucleus of key employees. Maximum production capacity is 45,900 units per quarter.
Assume that the division is using variable costing. How many units should be scheduled for production during the last quarter of the year?
Will the number of units scheduled for production affect the division’s reported income or loss for the year?
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 quarter?
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 65,340 units during the year, but by September 30 only the following activity had been reported:
Explanation / Answer
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Expected sales for the last quarter of the year 600 Desired minimum inventory 50 ** Total units needed for sales and desired EI 650 Less: Current inventory on hand -- September 30 400 Desired production for the 4th quarter 250 *** ** Inventory should be drawn down to save inventory carrying costs such as storage (rent, insurance), interest, and obsolescence. *** Production exceeds 200 units needed to "retain a nucleus of key employees" The number of units scheduled for production will not affect the reported operating income or loss for the year if variable costing is in use. All fixed MOH costs will be treated as an expense of the period regardless of the number of units produced. Thus, no fixed MOH cost will be shifted between periods through the inventory account, and income will be a function of the number of units sold, rather than a function of the number of units produced and sold.