Absorption costing, standard costs, governance. Advanced Engineering Company (AEC) is a multinational business selling metal products used in the assembly of many cars, trucks, and planes. AEC has more than 50 manufacturing divisions worldwide and is listed on the Toronto Stock Exchange. AEC has consistently reported annual earnings growth rates of 15% or more for each of the past ten years. Division managers at AEC receive an annual bonus of 30% of their annual salary if the plant operating income increases 15% or more over the previous year's operating income. Divi- sion managers who increase operating income more than 10% but less than 15% receive a bonus of 5% of their annual salary. Division managers who do not achieve a 10% increase in operating income receive no bonus. Instead, they receive a visit from the AEC corporate consulting team. Bob Wood is manager of the Mississauga, Ontario, division, which manufactures crank- shafts for sale to automobile manufacturers. Wood has just received a 30% bonus for 2010. Mary Easson, head of the AEC corporate consulting team, is less than impressed by Wood's performance. She suspects him of producing for inventory and collects the following infor- mation on the Mississauga division for 2010:

Manufacturing overhead is allocated to each crankshaft based on standard machinehours.
Each crankshaft has a standard machining time of 30 minutes. The denominator level in 2010 was the master-budget capacity utilization for the Mississauga plant, 500,000 &
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a. Operating income, $10,000 8 1. Absorption-costing operating income, $2,407,200 crankshafts. A standard absorption-costing system is used for each ALG plant jaAlliay eyeeraerear penne variances are recorded as a cost of the period in which they are incurred. All auto companies require suppliers to deliver on a just-in-time basis (that is, just before the crankshafts are required for assembly). The last four months of 2010 saw a reduction in the orders auto companies placed for crankshafts.
The price, spending, and efficiency manufacturing variances for 2010 were $360,000, unfavourable. The total marketing variances were $187,200, favourable (variable $156,000 favourable and fixed $31,200 favourable).
Operating income for the Mississauga division in 2010 was $1,712,412.
REQUIRED 1. Compute the absorption-costing operating income for the Mississauga division in 2010.
2. Why might Easson believe that in 2010 Wood engaged in behaviour not in the best interests of AEC? How might Wood respond to any charges Easson might make about producing for inventory?
3. Is the problem Easson raised likely to be eliminated by her talking to Wood about management ethics? Explain.
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Unit data in crankshafts: Beginning inventory Production 0 Ending inventory 480,000 30,000 Sales 450,000 Selling price per unit $79.20 Cost data: Standard variable costs per crankshaft: Direct materials $24.00 Direct manufacturing labour 6.00 Manufacturing overhead 14.40 Variable marketing 4.80 Standard fixed costs: Manufacturing overhead $10,800,000 Marketing 1,200,000