Palm Producers (PP) is expecting sales growth, and so it built nearly identical automated plants in San Jose, California, and in Singapore to produce its new Palm Powerhouse. Each plant manager is responsible for producing adequate inventories to meet sales orders and for maintaining quality while producing the Palm Powerhouse at the lowest possible cost.

Under PP’s decentralized organization, each plant maintains its own accounting records. Quarterly reports are filed with the corporate controller’s office and are then reviewed by corporate management. The following reports were filed for the third and fourth quarter by the two plants. 

ANALYZE INFORMATION

The following questions will help you analyze the information for this problem. Do not turn in your answers to these questions unless your professor asks you to do so.

A. Suppose each plant manager receives a bonus based on absorption costing operating income that is 5% of operating income. Calculate the fourth quarter bonus for each manager. Explain how this bonus plan might affect the managers’ production decisions. 

B. Examine changes in sales relative to cost of goods sold between the two quarters. What are two possible explanations for the San Jose plant’s profit increase during the fourth quarter?

C. Assume that variable costs in this industry are an immaterial part of cost of goods sold. Recast the fourth quarter financial statements using the variable costing approach.

D. What would you conclude about the relative performances of the two plant managers in the fourth quarter?

REQUIRED

Suppose you are the cost accountant for Palm Producers. Turn in your answers to the following.

E. Write a memo to the CFO recommending the type of income statement that would be best for monitoring divisional performance. Attach to the memo a schedule showing any computations that might be useful to the CFO. As appropriate, refer to the schedule in the memo.

SAN JOSE, CALIFORNIA, PLANT INCOME STATEMENT FOR THIRD AND FOURTH QUARTERS (IN THOUSANDS OF DOLLARS) Third Quarter Fourth Quarter Revenue Cost of goods sold Selling and administration expenses Interest expense Tax expense Net income $97,452 77,165 12,378 $110,951 74,613 12,632 4,251 6,809 $12,646 1,259 $ 2,338 SAN JOSE, CALIFORNIA, PLANT STATEMENT OF FINANCIAL POSITION FOR THIRD AND FOURTH QUARTERS (IN THOUSANDS OF DOLLARS) Fourth Quarter $322 148,635 uarter se Cash Inventory Plant (net of depreciation) Total assets $ 2,346 12,872 152,456 $167,674 30,972 $179,929 Liabilities and Owners' Equities 1,782 Accounts payable Construction bond payable Owners' equity Total liabilities Et OE 140,385 27,075 $167,674 138,426 39,721 $179,929 SINGAPORE PLANT INCOME STATEMENT FOR THIRD AND FOURTH QUARTERS TRANSLATED TO U.S. CURRENCY, IN THOUSANDS OF DOLLARS) Fourth Quarter Revenue Cost of goods sold Selling and administration expenses Interest expense Tax expense Net income $101,832 82,127 10,943 3,854 $111,085 87,990 10,453 3,733 3,190 SINGAPORE PLANT STATEMENT OF FINANCIAL POSITION FOR THIRD AND FOURTH QUARTERS TRANSLATED TO U.S. CURRENCY, IN THOUSANDS OF DOLLARS) Third Quarter $ 1,564 142,342 Fourth Quarter se Cash Inventory Plant (net of depreciation) Total assets 13,832 138,580 $156,054 $155,230 Liabilities and Owners' Equities Accounts payable Bond payable Owners' equity Total liabilities & O $ 347 135,762 130,921 24,912 $156,054 $155,230