Craig Company is a family- owned business in which you own 20% of the common stock and your brothers and sisters own the remaining shares. The employment contract of Craig’s new president, Ajay Pinder, stipulates a base salary of $ 140,000 per year plus 10% of income from operations in excess of $ 670,000. Craig uses the absorption costing method of reporting income from operations, which has averaged approximately $ 670,000 for the past several years.
Sales for 2014, Pinder’s first year as president of Craig Company, are estimated at 44,000 units at a selling price of $ 106 per unit. To maximize the use of Craig’s productive capacity, Pinder has decided to manufacture 55,000 units, rather than the 44,000 units of estimated sales. The beginning inventory at January 1, 2014, is insignificant in amount, and the manufacturing costs and selling and administrative expenses for the production of 44,000 and 55,000 units are as follows:

1. In one group, prepare an absorption costing income statement for the year ending December 31, 2014, based on sales of 44,000 units and the manufacture of 44,000 units. In the other group, conduct the same analysis, assuming production of 55,000 units.
2. Explain the difference in the income from operations reported in (1).
3. Compute Pinder’s total salary for the year 2014, based on sales of 44,000 units and the manufacture of 44,000 units (Group 1) and 55,000 units (Group 2). Compare your answers.
4. In addition to maximizing the use of Craig Company’s productive capacity, why might Pinder wish to manufacture 55,000 units rather than 44,000 units?
5. Can you suggest an alternative way in which Pinder’s salary could be deter-mined, using a base salary of $ 140,000 and 10% of income from operations in excess of $ 670,000, so that the salary could not be increased by simply manufacturing moreunits?

  • CreatedJune 27, 2014
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