Scott Hewitt, the new Plant Manager of Old World Manufacturing Plant Number 7, has just reviewed a draft of his year-end financial statements. Hewitt receives a year-end bonus of 10% 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, Hewitt demanded that his controller go back and “work the numbers” again. Hewitt insisted that if he didn’t see a better operating income number the next time around he would be forced to look for a new controller. Old World 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 $3,250,000 are classified as period expenses. Hewitt had suggested that warehousing costs be included as product costs because they are “definitely related to our product.” The company produced 200,000 units during the period and sold 180,000 units.

As the controller reworked the numbers he discovered that if he included warehousing costs as product costs, he could improve operating income by $325,000. He was also sure these new numbers would make Hewitt happy.

Required

1. Show numerically how operating income would improve by $325,000 just by classifying the preceding costs as product costs instead of period expenses?

2. Is Hewitt correct in his justification that these costs “are definitely related to our product?”

3. By how much will Hewitt profit personally if the controller makes the adjustments in requirement 1.

4. What should the plant controller do?