The Paul Company stresses competition among the heads of its various divisions, and it rewards stellar performance with year-end bonuses that vary between 5 and 10 percent of division net operating income (before considering the bonus or income taxes). The divisional managers have great discretion in setting production schedules. 

The Normandy division produces and sells a product for which there is a long-standing demand but which can have marked seasonal and year-toyear fluctuations. On November 30, 2010, Byron LeDoux, the Normandy division manager, is preparing a production schedule for December. The following data are available for January 1 through November 30. 

Production in October and November was 10,000 units each month. Practical capacity is 12,000 units per month. Maximum available storage space for inventory is 25,000 units. The sales outlook, for December through February, is 6,000 units monthly. To retain a core of key employees, monthly production cannot be scheduled at less than 4,000 units without special permission from the president. Inventory is never to be less than 10,000 units. The denominator for applying fixed factory overhead is regarded as 120,000 units annually. The company uses a standard absorption-costing system. All variances are disposed of at year-end as an adjustment to standard cost of goods sold.

1. Given the restrictions as stated, and assuming that the manager wants to maximize the company’s net income for 2010 

a. How many units should be scheduled for production in December? 

b. What net operating income will be reported for 2010 as a whole, assuming that the implied cost-behaviour patterns will continue in December as they did throughout the year to date? Show your computations. 

c. If December production is scheduled at 4,000 units, what would reported net income be? 

2. Assume that standard variable costing is used rather than standard absorption costing: 

a. What would net income for 2010 be, assuming that the December production schedule is the one in requirement 1, part a? 

b. Assuming that December production was 4,000 units? 

c. Reconcile the net incomes in this requirement with those in requirement 1.

3. From the viewpoint of the long-run interests of the company as a whole, what production schedule should the division manager set? Explain fully. Include in your explanation a comparison of the motivating influence of absorption and variable costing in this situation. 

4. Assume standard absorption costing. The manager wants to maximize his after-income-tax performance over the long run. Given the data at the beginning of the problem, assume that income tax rates will be halved in 2011. Assume also that year-end writeoffs of variances are acceptable for income tax purposes. How many units should be scheduled for production in December? Why?