On your first day as assistant to the president of Harold Systems Inc. (HSI), your in-box contains the following memo. 

To: Assistant to the President 

From: The President 

Subject: Mickey Mouse Watch Situation 

This note is to bring you up to date on one of our acquisition problem areas. Market research detected the current nostalgia wave almost a year ago and concluded that HSI should acquire a position in this market. Research data showed that Mickey Mouse Watches could become profitable ($5 contribution margin on $12 sales price) at a volume of 40,000 units per plant if they became popular again. Consequently, we picked up closed-down facilities on each coast, staffed them, and asked them to keep us posted on operations. 

Friday I got preliminary information from accounting that is unclear. I want you to find out why their costs of goods sold are far apart and how we should have them report in the future to avoid confusion. This is particularly important in the Mickey Mouse case, as market projections look bad and we may have to close one plant. I guess we’ll close the West Coast plant unless you can show otherwise. 

Preliminary Accounting Report 

Required 

As the assistant to the president, what is your response to the president’s memo?

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East West $480,000 $480,000 Sales Cost of goods sold Gross margin Administration costs (fixed) 280,000 450,000 200,000 300,000 30,000 30,000 $170,000 Net income Production 80,000 units 40,000 units $ 85,000 $170,000 favourable Variances (included in cost of goods sold) unfavourable