Easter Pacific Lumber (EPL) is a private forestry company located on Vancouver Island in British Columbia. The company uses a bonus plan to reward its management staff according to their areas of responsibility. For example, the chief operating officer receives a bonus of 1% of net income, the sales manager receives 0.1% of revenues, and the production manager receives $20,000 for each dollar that per unit production costs fall below $280/Mbf. The CEO owns 40% of the company and receives no explicit bonuses; rather, the board of directors sets his pay after considering many different performance factors.
You are an internal auditor at EPL. As an internal auditor, you report directly to the board of directors. While conducting your review of the preliminary financial statements for 2012, you collected the following information:

Accounting policies:
Inventories are carried at the lower of cost, derived using the FIFO method, and net realizable value. Cost of goods sold includes export tariffs amounting to SI 7.7 million in 2012 (2011 - S28.5 million); these amounts were paid on exports to the United States. Operating information:
Sales volume increased from 500,000Mbf in 2011 to 600,000Mbf in 2012. Average sales price declined from S445Mlbf in 2011 to S413Mbf in 2012.
Fixed costs of production have been approximately $34 million per year.
Inventory at the beginning of 2011 was 546,053,000.
In conversations with the controller, she felt that 2012 had been a successful year despite the significant decline in lumber prices. She attributed the success to the ability of the factory to control costs, which resulted in cost of goods sold per unit declining by 2.4%. The production manager was in agreement with this assessment and pointed out that production costs decreased by $10/Mbf from $272 to $262/Mbf.
Required:
Analyze the information you have collected and evaluate EPL's performance in 2012. As the internal auditor, do you have any concerns? If so, what would you recommend to the board of directors in order to address these concerns in the future?

Transcribed Image Text:

2011 Accounts receivable Total current assets Revenue Cost of goods sold Gross profit s 72517 2