Carlos Cavalas, the manager of Echo Products’ Brazilian Division, is trying to s
ID: 2416058 • 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 66,440 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 29,100 units. The minimum inventory level that the division should carry is 2,800 units. Mr. Cavalas is aware that production must be at least 6,660 units per quarter in order to retain a nucleus of key employees. Maximum production capacity is 45,200 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 66,440 units during the year, but by September 30 only the following activity had been reported:
Explanation / Answer
If the division is using variable costing then the number of units that should be produced during the last quarterare calculated as follows:
The production can be done upto the maximum production capacity per quarter which is 45200 units.
Out of these 17500 units are forecasted to be sold and 2800 units are to be carried to maintain the minimum inventory level and the balance of the units(45200 - 17500-2800) i.e 24900 units can be rented.
As the fixed manufacturing overheads plays an important role the production should be used fully.
1-b. No, the reported income or loss for the year would remain same.
2. To maximize the operating profit, production should be scheduled for 17500 + 2800 i.e for 20300 units.
This way the labour and variable overhead costs would be low and there would be no cost for renting the storage warehouse for extra units produced.