Inventory costing and management planning. It is November 30, 2007. Consider the income statement (shown below) for the operations of Industrial Products, Inc., forJanuary through November 2007.

Production in the past three months has been 100 units monthly. Practical capacity is 125 units monthly. To retain a stable nucleus of key employees, management never schedules monthly production at fewer than 40 units.

Maximum available storage space for inventory is regarded as 200 units. The sales outlook for the next four months is 70 units monthly. Inventory is never to be fewer than 50 units.

Industrial Products, Inc.

Income Statement for 11 Months Ended November 30, 2007 Units Dollars Revenues @ $1,200 Cost of goods sold:

Beginning inventory, December 31, 2006, 1,000

$ 48,000

$1,200,000

@$960 Manufacturing costs @ $960, including 50

$720 per unit for fixed manufacturing overhead Total standard cost of goods available 1,100 1,056,000 for sale Ending inventory, November 30, 2007, 1,150 1,104,000

@$960 150 144,000 Standard cost of goods sold*

Gross margin Marketing, distribution, and customer-service costs:

Variable, 1,000 units @ $60 1,000 60,000 960,000 240,000 Fixed, @ $12,000 monthly Operating income 132,000 192,000

$ 48,000

‘There are no variances for the 11-month period considered as a whole.

The company uses a standard absorption costing system. The denominator production level is 1,200 units annually. All variances are disposed of at year-end as an adjustment to cost of goods sold.

358 CHAPTER 9 Required 1. The division manager is given an annual bonus that is geared to operating income. Assume that the manager wants to maximize the company’s operating income for 2007. How many units should the manager schedule for production in December? Note that you do not have to (nor should you) compute the operating income for 2007 in this or in subsequent parts of this problem.

2. Assume that standard variable costing is in use rather than standard absorption costing.

Would variable costing operating income for 2007 be higher, lower, or the same as stan¬

dard absorption costing income, assuming that production for December is 80 units and sales are 70 units? Why?

3. Ifstandard variable costing were used, what production schedule should the division man¬

ager set? Why?

4. Assume that the manager is interested in maximizing his performance over the long run and that performance is being judged based on net income. Assume that the company’s income tax rate will be substantially reduced in 2008 and that the year-end writeoffs of variances are acceptable for income tax purposes. Assume that standard absorption costing is used. How many units should be scheduled for production in December? Why?

5. Assume that the total production and total sales for 2006 and 2007, taken together, will be unchanged by the specific decision in requirement 4. Assume also that the standards will be unchanged in 2008. Suppose the decision in requirement 4 is to schedule 50 units instead of an originally scheduled 120 units. By how much will operating income in 2008 be affected by the decision to schedule 50 units in December 2007? (That is, how much operating income is shifted from 2007 to 2008?)