On July 2, 2017 Maddon Financial acquired 90 percent of the outstanding stock of Kluber Industries in exchange for 2,000 shares of its own stock. Maddon Financial has a reputation as a “high flier”

company that commands a high price-to-earnings ratio because its management team works wonders in improving the performance of ailing companies.

At the time of the acquisition, Kluber was producing and selling at an annual rate of 100,000 units per year. This is in line with the firm’s average annual activity. Fifty thousand units were produced and sold during the first half of 2017.

Immediately after the acquisition Maddon Financial installed its own management team and increased production to practical capacity. One-hundred thousand units were produced during the second half of 2017.

At the end of the year, the new management declared another dramatic turnaround and a

\($100,000\) cash dividend when the following set of income statements were issued:

Required
As the only representative of the minority interest on the board of directors, evaluate the performance of the new management team.

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Sales.... KLUBER INDUSTRIES Income Statement For the first and second half-years of 2017 Cost of goods sold* Gross profit...... Selling and administrative expenses Net income... First Second Total $1,400,000 $1,400,000 $2,800,000 (1,200,000) (700,000) (1,900,000) 200,000 700,000 900,000 (200,000) (400,000) (600,000) $ 0 $ 300,000 $ 300,000 Absorption costing with any under-absorbed or over-absorbed overhead written off as an adjustment to cost of goods sold. Kluber applies manufacturing overhead using a predetermined overhead rate based on predicted annual fixed overhead of $1,000,000 and annual production of 100,000 units.