Palm Producers PP is expecting sales growth and so it
Palm Producers (PP) is expecting sales growth, and so it built nearly identical automated plants in San Jose, California, and in Singapore to produce its new Palm Powerhouse. Each plant manager is responsible for producing adequate inventories to meet sales orders and for maintaining quality while producing the Palm Powerhouse at the lowest possible cost.
Under PP’s decentralized organization, each plant maintains its own accounting records. Quarterly reports are filed with the corporate controller’s office and are then reviewed by corporate management. The following reports were filed for the third and fourth quarter by the two plants.

The following questions will help you analyze the information for this problem. Do not turn in your answers to these questions unless your professor asks you to do so.
A. Suppose each plant manager receives a bonus based on absorption costing operating income that is 5% of operating income. Calculate the fourth quarter bonus for each manager. Explain how this bonus plan might affect the managers’ production decisions.
B. Examine changes in sales relative to cost of goods sold between the two quarters. What are two possible explanations for the San Jose plant’s profit increase during the fourth quarter?
C. Assume that variable costs in this industry are an immaterial part of cost of goods sold. Recast the fourth quarter financial statements using the variable costing approach.
D. What would you conclude about the relative performances of the two plant managers in the fourth quarter?

Suppose you are the cost accountant for Palm Producers. Turn in your answers to the following.
E. Write a memo to the CFO recommending the type of income statement that would be best for monitoring divisional performance. Attach to the memo a schedule showing any computations that might be useful to the CFO. As appropriate, refer to the schedule in thememo.
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