Maypool Corporation is the major consumer appliance manufacturer in a country that experiences no inflation. The company produces a variety of large appliances for the home such as stoves, refrigerators, washers and dryers. Each fall its executive committee meets and develops operating plans for the next three years and a budget for the upcoming year. Standard absorption costing methods are used, and factory overhead rates are developed in the fall for the next year based on the year's projected sales. Sales and other economic factors indicate that the country is in a recession which is expected to last about five years.

The president, while considering the budget for \(20 \mathrm{X} 3\), has become concerned about observed trends in decreasing sales volume and increasing product costs. The actual sales of the model 200 dryer for \(20 \mathrm{X} 1\) and \(20 \mathrm{X} 2\), and projected sales for \(20 \mathrm{X} 3-\mathrm{X} 5\) are as follows:

Maypool could raise prices to maintain its profitability, but the president is concerned that this action would depress sales even further. Fixed factory overhead for the dryer will remain constant at \(\$ 500,000\) over this five year period. Variable manufacturing costs are \(\$ 200\) per unit and are not expected to change.
Required:

(a) Compute the standard absorption cost per unit for each year from 20X1 through \(20 \times 5\)

(b) What problems can you foresee with using these unit costs for making decisions regarding cost control and product prices?

(c) As a management accountant and advisor to the president, what recommendations can you make?

Transcribed Image Text:

Year Sales and Production 20X1 10,000 units (actual) 20X2 8,000 units (actual) 20X3 20X4 6,000 units (projected) 7,000 units (projected) 20X5 9,000 units (projected)