In the first year of operations, Naivete Company experienced a $ 500,000 net loss even though it sold 250,000 units. Management was very concerned about this outcome, so it hired an efficiency expert to turn the company€™s operations around. The efficiency expert guaranteed the company a profitable second year. The expert stressed, €œI agree to work for you for one year at no salary. At the end of the year, if your net income is not at least $ 500,000, you pay me nothing. If your income is $ 500,000 or more, you pay me $ 500,000.€
Naivete€™s income statement for the first year of operations is:

In the second year of operations, the same number of units were sold, but the company produced 750,000 units. The selling price and costs remained constant, which resulted in the following income statement:

Required:
Explain to the managers of Naivete Company, in detail, what happened to operations in the second year.

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Sales (250,000 units at $16) Cost of goods sold: $4,000,000 Beginning inventory Cost of goods manufactured Cost of goods available Ending inventory 3,750,000 $3,750,000 3,750,000 S 250,000 750,000 Gross margin Selling and administrative expenses Netloss Cost of goods manufactured is composed of the following Direct materials Direct labor Unit-related overhead Other nonunit-related overhead 750,000 500,000 1,000,000 1,500,000 $3,750,000 $4,000,000 Sales (250,000 units at $16) Cost of goods sold: Beginning inventory Cost of goods manufactured 8,250,000 $8,250,000 5,500,000 Cost of goods available Ending inventory Gross margin Selling and administrative expenses Income before bonus Bonus Netincome 2750000 $1,250,000 750,000 500,000 500,000