Deliverable 2 Case
Incentives Created by Absorption Costing: Ethics and the Manager
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 3,600 units during the year, but, by September 30, only the following activity had been reported:
Units
Inventory, January 1
0
Production
2,400
Sales
2,000
Inventory, September 30
400
The division can rent warehouse space to store up to 1,000 units. The minimum inventory level that the division should carry is 50 units. Mr. Cavalas is aware that production must be at least 200 units per quarter in order to retain a nucleus of key employees. The maximum production capacity is 1,500 units per quarter.
The demand has been soft, and the sales forecast for the last quarter is only 600 units. Due to the nature of the division’s operations, fixed manufacturing overhead is a major element of the product cost.
Required:
- Assume that the division is using variable costing. How many units should be scheduled for production during the last quarter of the year?
- Will the number of units scheduled for production affect the division’s reported income or loss for the year?
- 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 division’s operating income for the year, how many units should be scheduled for production during the last quarter?
- What do you think is in the best interest of the company and its stakeholders as to how many units to be scheduled for production and why?
Submit a written response to this case in the form of a 200-300-word email to Mr. Cavalas. Be sure to support your recommendation in a way that demonstrates your competency.
Evaluation
You may submit this deliverable for initial feedback. Faculty will review your work using a scoring guide that reflects competency levels required in the workplace and will provide you with substantive feedback and suggestions for how to improve if needed. It is good practice to review both the evaluation checklist and the scoring guide as you prepare your deliverable.