The board of directors of Mesa Verde Tool Company set the profit goal for calendar year 2016 at $2,200,000. It also established a bonus plan in which the top five officers of the company will share $150,000 if the profit goal is met or exceeded. If the goal is not met, there is no bonus. T. J. Elias, the chief financial officer and one of the top five executives, prepared the following budgeted income statement for 2016, based on the board€™s profit directive:

By late September, it became apparent that sales were running below fore- cast and that annual sales would approximate 450,000 units, for an estimated net income of $1,230,000 and no bonus. In an executive committee strategy meeting, Bob Wrangell, vice president of Manufacturing, suggested that the production capacity was available to produce the entire 500,000 units or more, even if that sales level could not be reached. He remembered a presenter, from a seminar that he recently attended, describing how net income could be increased by producing more than can be sold. He urged Elias to determine how many extra units they would need to produce to achieve the profit goal and, thus, earn the bonus.
Required:
1. If sales only reach 450,000 units for the year, how many additional units would have to be produced, given the current selling price and cost structure, to meet the budgeted profit of $2,200,000?
2. Prepare an absorption costing income statement to prove your answer above.
3. What ethical responsibility, if any, does Elias have in this situation?
4. What is there about the bonus plan that potentially encourages unethical behavior?

Transcribed Image Text:

Mesa Verde Tool Company Budgeted Income Statement For the Year Ended December 31, 2016 $15,000,000 Cost of goods sold: $-0- 8,000,000 $8,000,000 Cost of goods manufactured. Cost of goods available for sale. . . . . . . Ending inventory Gross margin. Selling and administrative expenses . .. .. 8,000,000 7,000,000 $2,800,000 4,800,000 $2,200,000 Fixed selling and administrative 2,000,000