Problem 6-27 (Algo) Incentives Created by Absorption Costing; Ethics and the Manager [LO6-2]

Carlos Cavalas, the manager of Echo Products Brazilian Division, is trying to set the production schedule for the last quarter of the year. The Brazilian Division had planned to sell 68,090 units during the year, but by September 30 only the following activity had been reported:

	Units
Inventory, January 1	0
Production	73,400
Sales	61,900
Inventory, September 30	11,500

The division can rent warehouse space to store up to 29,200 units. The minimum inventory level that the division should carry is 1,800 units. Mr. Cavalas is aware that production must be at least 6,900 units per quarter in order to retain a nucleus of key employees. Maximum production capacity is 45,000 units per quarter.

Demand has been soft, and the sales forecast for the last quarter is only 20,400 units. Due to the nature of the divisions operations, fixed manufacturing overhead is a major element of product cost.

Required:

1a.

Assume that the division is using variable costing. How many units should be scheduled for production during the last quarter of the year?

Required production

units

1b.

Assume that the division is using variable costing. Will the number of units scheduled for production affect the divisions reported income or loss for the year?

Yes or No

1c.

Assume that the division is using absorption costing and that the divisional manager is given an annual bonus based on divisional operating income. If Mr. Cavalas wants to maximize his divisions operating income for the year, how many units should be scheduled for production during the last quarter?

Required production

units