Solutions_Assignment05 - AF2110 Assignment05 (suggested...

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Unformatted text preview: AF2110 Assignment05 (suggested solutions) Chapter 07 Problem 7-15 (30 minutes) 1. Because of soft demand for the Australian Division’s product, the inve n- tory should be drawn down to the minimum level of 1,500 units. Draw- ing inventory down to the minimum level would require production as follows during the last quarter: Desired inventory, December 31 ............ 1,500 units Expected sales, last quarter .................. 18,000 units Total needs .......................................... 19,500 units Less inventory, September 30 ................ 12,000 units Required production ............................. 7,500 units Drawing inventory down to the minimum level would save inventory car- rying costs such as storage (rent, insurance), interest, and obsoles- cence. The number of units scheduled for production will not affect the re- ported net operating income or loss for the year if variable costing is in use. All fixed manufacturing overhead cost will be treated as an expense of the period regardless of the number of units produced. Thus, no fixed manufacturing overhead cost will be shifted between periods through the inventory account and income will be a function of the number of units sold, rather than a function of the number of units produced. 2. To maximize the Australian Division’s operating income, Mr. Constantinos could produce as many units as storage facilities will allow. By building inventory to the maximum level, Mr. Constantinos will be able to defer a portion of the year’s fixed manufacturing overhead costs to future years through the inventory account, rather than having all of these costs ap- pear as charges on the current year’s income stat ement. Building inven- tory to the maximum level of 30,000 units would require production as follows during the last quarter: Desired inventory, December 31 ............ 30,000 units Expected sales, last quarter .................. 18,000 units Total needs .......................................... 48,000 units Less inventory, September 30 ................ 12,000 units Required production ............................. 36,000 units Problem 7-15 (continued) Thus, by producing enough units to build inventory to the maximum level that storage facilities will allow, Mr. Constantinos could relieve the current year of fixed manufacturing overhead cost and thereby maxim- ize the current year’s net operating income. 3. By setting a production schedule that will maximize his division’s net o p- erating income — and maximize his own bonus — Mr. Constantinos will be acting against the best interests of the company as a whole. The extra units aren’t needed and will be expensive to carry in inventory. Mor eo- ver, there is no indication that demand will be any better next year than it has been in the current year, so the company may be required to carry the extra units in inventory a long time before they are ultimately sold....
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Solutions_Assignment05 - AF2110 Assignment05 (suggested...

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