Fitness Forever International sells personal exercise equipment both within Australia and internationally. One division of Fitness Forever produces a product called Absaway, which is a specialised piece of equipment that focuses on exercising the abdominal region. The Absaway is manufactured with both internally sourced and purchased-in components.

The divisional performance report shows that the division made sales of 20 000 units at a price of $100 each. The variable costs were $60 per unit. Fixed costs were $200 000.

Fitness Forever calculates managers’ bonuses based on profit. The manager of the Absaway division wants to maximise his bonus. To ensure that the divisional margin is reported at its highest possible level, the manager has been producing more units of the Absaway than required based on 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. This, in turn increases the divisional margin. The extra production of Absaway units 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 boost divisional profits. Is it in the best interest of Fitness Forever?

(b) You have been asked to comment on the current reward system at the next board meeting and make recommendations about any changes you think are necessary. What will you say?