The product sells for $16 per gallon, and in recent months the company has had sales of more than 525,000 gallons per month. Consumers mix 1 part syrup with 5 parts water to make a drink that “replenishes vital bodily fluids following exertion.” At the start of April, there were 200,000 gallons in beginning Work in Process. The product was 100 percent complete with respect to material and 50 percent complete with respect to conversion costs. During April, 500,000 gallons were started. Of the 700,000 units to account for, 100,000 gallons remained in process at the end of April. These units were 100 percent complete with respect to material and 20 percent complete with respect to conversion costs; 300,000 gallons were completed during April and, unfortunately, 300,000 gallons were lost owing to worker error. The production process calls for sodium to be added at the start of the process. On two separate occasions, a new worker added too much sodium, and batches were ruined. The errors were not identified until the end of the production process when batches were tested for quality assurance. Needless to say, the worker was fired.

a. Assume that 80 percent of the units completed in April are sold in that month. What will be the difference in reported profit between the two approaches?
b. Which approach is most appropriate from a conceptual standpoint?
c. Senior managers at Western Beverage receive monthly bonuses determined as a percent of profit in excess of a targeted level of profit. Which method will they favor?

  • CreatedSeptember 13, 2013
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