Hamilton Semiconductors manufactures specialized chips that sell for $20 each. Hamilton's manufacturing costs consist of variable cost of $2 per chip and fixed costs of $9,000,000. Hamilton also incurs $400,000 in fixed marketing costs each year.
Hamilton calculates operating income using absorption costing-that is, Hamilton cal culates manufacturing cost per unit by dividing total manufacturing costs by actual produc tion. Hamilton costs all units in inventory at this rate and expenses the costs in the income statement at the time when the units in inventory are sold. Next year, 2014, appears to be a difficult year for Hamilton. It expects to sell only 500,000 units. The demand for these chips fluctuates considerably, so Hamilton usually holds minimal inventory.
1. Calculate Hamilton's operating income in 2014 (a) if Hamilton manufactures 500,000 units and (b) if Hamilton manufactures 600,000 units.
2. Would it be unethical for Randy Jones, the general manager of Hamilton Semi conductors, to produce more units than can be sold in order to show better operating results?Jones'scompensationhasabonuscomponentbasedonoperatingincome.Explain your answer.
3. Would it be unethical for Jones to ask distributors to buy more product than they need? Hamilton follows the industry practice of booking sales when products are shipped to distributors. Explain your answer.