Scott Wadzicki was hired in January 2012 to manage the home products division of Advanced Techno. As part of his employment contract, he was told that he would get an extra $5,000 bonus for every 1% increase by which the division's profits exceeded the previous year's profits.
Soon after coming on board, Scott met with his plant managers and explained that he wanted the plants to be run at full capacity. Previously, the plant had employed just-in-time inventory practices and had consequently produced units only as they were needed. Scott stated that, under the previous management, the company had missed out on too many sales opportunities because it did not have enough inventory on hand. Because the previous management had employed just-in-time inventory practices, when Scott came on board, there was virtually no beginning inventory. The selling price and variable cost per unit remained the same from 2011 to 2012. Additional information follows:
__________________________________ 2011 ________________ 2012
Net income ..................................... $ 400,000 ............... $ 600,000
Units produced ....................................... 20,000 ...................... 25,000
Units sold ........................................... 20,000 ...................... 20,000
Fixed manufacturing costs ..................... $1,000,000 ............ $1,000,000
Fixed manufacturing costs per unit ................ $ 50 ........................ $ 40
Instructions
(a) Calculate Scott's bonus based on the net income figures shown.
(b) Recalculate the 2011 and 2012 results using variable costing.
(c) Recalculate Scott's 2012 bonus under variable costing.
(d) Were Scott's actions unethical? Do you think any actions need to be taken by the company?