4P8.34A (LO 1, 2, 3) Sun Company, a wholly owned subsidiary of Guardian Inc., produces and sells three main product lines. At the beginning of 2022, the president of Sun Company presented the budget to the parent company and accepted a commitment to contribute $15,800 to Guardians consolidated profit in 2022. The president was confident that the years profit would exceed the budget target, since the monthly sales reports had shown that sales for the year would be 10% more than what had been predicted in the budget. The president is both disturbed and confused when the controller presents an adjusted forecast as at November 30, 2022, indicating that profits will be 11% under budget. The two forecasts are presented below:

SUN COMPANY Forecasts of Operating Results
	January 1, 2022	November 30, 2022
Sales	$268,000	$294,800
Cost of sales	212,000*	233,200
Gross margin	56,000	61,600
Over-applied (under-applied) fixed manufacturing overhead	0	(6,000)
Actual gross margin	56,000	55,600
Selling expenses	13,400	14,740
Administrative expenses	26,800	26,800
Total operating expenses	40,200	41,540
Earnings before tax	$15,800	$14,060
*Includes fixed manufacturing overhead of $30,000.

There have been no sales price changes or product-mix shifts since the January 1, 2022, forecast. Variable costs have remained constant throughout the year. The only cost that has varied in the income statement is the under-applied manufacturing overhead. This happened because the company worked only 16,000 machine hours during 2022 (budgeted machine hours were 20,000) as a result of a shortage of raw materials when its main supplier was closed by a strike. Fortunately, Sun Companys finished goods inventory was large enough to fill all sales orders received.

Instructions

1. A Analyze and explain why profit has declined in spite of increased sales and control over costs.
2. B What plan, if any, could Sun Company adopt during December to improve the reported profit at year end? Explain your answer.
3. C Explain and illustrate how Sun Company could use a different internal cost reporting procedure that would not result in the confusing effect of the procedure it currently uses.