Loog International is a provider of personal exercise equipment. One division of Loog Inter- national produces...
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Loog International is a provider of personal exercise equipment. One division of Loog Inter- national produces a product called Belly Fantastic, which is a specialised piece of equipment that focuses on exercising the abdominal region. Most of the components for the Belly Fantastic are sourced from various entities, warehoused and retrieved during production runs. Some com- ponents are made by the division. The divisional report shows that the division made sales of 12000 units at a price of $80 each. The variable costs were $50 per unit, with fixed costs of $190 000. The entity calculates managers' bonuses on the profit. The manager of the Belly Fantastic division wants to receive as big a bonus as possible. To ensure that the divisional margin is reported at its highest possible level, the manager has been producing more units of the Belly Fantastic than would be required according to sales forecasts. Producing more units has the effect of increasing the ending inventory, which in the statement of profit or loss reduces the cost of sales amount. This in turn increases the divisional margin. The extra production of Belly Fan- tastic then has to be stored, thus increasing the need for warehouse space. Required a. Comment on the strategy of the manager to produce more units of product than are needed in order to adjust the closing inventory and raise the profit. Is this practice in the best interests of the entity's long-term survival? b. Discuss the use of divisional margin as a performance measure. Loog International is a provider of personal exercise equipment. One division of Loog Inter- national produces a product called Belly Fantastic, which is a specialised piece of equipment that focuses on exercising the abdominal region. Most of the components for the Belly Fantastic are sourced from various entities, warehoused and retrieved during production runs. Some com- ponents are made by the division. The divisional report shows that the division made sales of 12000 units at a price of $80 each. The variable costs were $50 per unit, with fixed costs of $190 000. The entity calculates managers' bonuses on the profit. The manager of the Belly Fantastic division wants to receive as big a bonus as possible. To ensure that the divisional margin is reported at its highest possible level, the manager has been producing more units of the Belly Fantastic than would be required according to sales forecasts. Producing more units has the effect of increasing the ending inventory, which in the statement of profit or loss reduces the cost of sales amount. This in turn increases the divisional margin. The extra production of Belly Fan- tastic then has to be stored, thus increasing the need for warehouse space. Required a. Comment on the strategy of the manager to produce more units of product than are needed in order to adjust the closing inventory and raise the profit. Is this practice in the best interests of the entity's long-term survival? b. Discuss the use of divisional margin as a performance measure.
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a This strategy is not in the best interests of the entitys longterm survival because it ... View the full answer
Related Book For
Principles Of Managerial Finance
ISBN: 978-0136119463
13th Edition
Authors: Lawrence J. Gitman, Chad J. Zutter
Posted Date:
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