Stanford Semiconductors manufactures specialized chips that sell for $ 50 each. Stanford’s manufacturing costs consist of variable cost of $ 6 per chip and fixed costs of $ 16,000,000. Stanford also incurs $ 1,800,000 in fixed marketing costs each year. Stanford calculates operating income using absorption costing— that is, Stanford calculates manufacturing cost per unit by dividing total manufacturing costs by actual production. Stanford 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 Stanford. It expects to sell only 400,000 units. The demand for these chips fluctuates considerably, so Stanford usually holds minimal inventory.

Required

1. Calculate Stanford’s operating income in 2014

(a) If Stanford manufactures 400,000 units and

(b) If it manufactures 500,000 units.

2. Would it be unethical for Randy Franklin, general manager of Stanford Semiconductors, to produce more units than can be sold in order to show better operating results? Franklin’s compensation has a bonus component based on operating income. Explain your answer.

3. Would it be unethical for Franklin to ask distributors to buy more product than they need? Stanford follows the industry practice of booking sales when products are shipped to distributors. Explain your answer.