Sun Company, a wholly owned subsidiary of Guardian, Inc., produces and sells three main product lines. At the beginning of 2015, the president of Sun Company presented the budget to the parent company and accepted a commitment to contribute $15,800 to Guardian's consolidated profit in 2016. The president was confident that the year's profit would exceed the budget target, since the monthly sales reports had shown that sales for the year would be 10% more than what had been predicted in the budget. The president is both disturbed and confused when the controller presents an adjusted forecast as at November 30, 2016, indicating that profits will be 11% under budget. The two forecasts are presented below:

There have been no sales price changes or product-mix shifts since the January 1, 2016, forecast. Variable costs have remained constant throughout the year. The only cost that has varied in the income statement is the underapplied manufacturing overhead. This happened because the company worked only 16,000 machine hours during 2016 (budgeted machine hours were 20,000) as a result of a shortage of raw materials when its main supplier was closed by a strike. Fortunately, Sun Company's finished goods inventory was large enough to fill all sales orders received.
Instructions
(a) Analyze and explain why profit has declined in spite of increased sales and control over costs.
(b) What plan, if any, could Sun Company adopt during December to improve the reported profit at year end? Explain your answer.
(c) Explain and illustrate how Sun Company could use a different internal cost reporting procedure that would not result in the confusing effect of the procedure it currently uses.

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SUN COMPANY Forecasts of Operating Results January 1, 2016November 30, 2016 Sales Cost of sales Gross margin Overapplied (underapplied) fixed manufacturing overhead Actual gross margin Selling expenses Administrative expenses Total operating expenses Earnings before tax Includes fixed manufacturing overhead of $30,000. $268,000 $294,800 233,200 61,600 6,000) 55,600 14,740 26,800 41,540 $14,060 212,000* 56,000 56,000 13,400 26,800 40,200 $ 15,800