Question $1(12$ Marks$)$

Wendy Jackson, the new plant manager of Binary Manufacturing has just reviewed a draft of his year$-$end financial statements. Wendy receives a year$-$end bonus of $\backslash (10\backslash \%\backslash )$ of the plant's operating income before tax. The year$-$end income statement provided by the plant's controller was disappointing to say the least.

After reviewing the numbers, Wendy demanded that his controller go back and "work the numbers" again. Wendy insisted that if he didn't see a better operating income the next time he would be forced to look for a new controller. Binary Manufacturing classifies all costs directly related to the manufacturing of its product as product costs. These costs are inventoried and later expensed as costs of goods sold when the product is sold.

All other expenses, including finished goods warehousing costs of $\backslash (\backslash$$ $351,928\backslash )$ are classified as period expenses. Wendy had suggested that warehousing costs be included as product costs because they are "definitely related to our product". The company produced $216,571$ units during the period and sold $194,914$ units. As the controller reworked the numbers, he discovered that if he included warehousing costs as product costs, he could improve operating income by $\backslash (\backslash$$ $351,928\backslash ).$ He was also sure that these new numbers would make Wendy happy.

Instructions:

$1.$ Show numerically how operating income would improve by $\backslash (\backslash$$ $351,928\backslash )$ just by classifying the preceding costs as product costs instead of period expense? $(6$ marks$)$

$2.$ Is Wendy correct in his justification that these costs "are definitely related to our product"? $(4$ marks$)$

$3.$ What should the plant controller do$?(2$ marks$)$