Armor Publishers makes textbooks for college courses. The company recently hired a new editor, Annie Smith, to handle production and sales of books for an Introduction to Accounting course. Annie's bonus is calculated based on the gross margin associated with sales of this textbook. She needs to decide how many copies of the book to produce. The following information is available for the Spring semester of 2021:

Sales budget ... 50,000 books

Beginning inventory ... 0 books

Average selling price.. $250 per book

Variable production costs... $100 per book

Fixed production costs $1,500,000 per semester

The fixed cost allocation rate is based on the sales budget and is therefore equal to $1,500,000/50,000 books = $30 per book. Annie is trying to decide whether to produce 50,000, 55,000, or 60,000 books.

Required:

1. Assuming that estimated sales budget is constant at 50,000 books regardless of how many books are produced, prepare absorption costing income statements to calculate expected gross margin using these three production levels: 50,000, 55,000, and 60,000 books. Make sure to adjust cost of goods sold for the production-volume variance, if any.

2. Calculate ending inventory in units and in dollars for each production level.

3. Managers who are paid a bonus that is a function of Gross Margin may be incentivized to produce products in excess of demand to maximize their own bonus. To discourage this self-interested behavior, Armor Publishing is considering incorporating an opportunity cost charge of 15% of the cost of ending inventory for evaluating managers.

1. Revise the absorption costing income statements above to show a line item for the 15% opportunity cost charge (add the line item below the Cost of Goods Sold line) to calculate new gross margin figures for each production level.

Do you think this idea will accomplish the above objective? Why or why not? Explain briefly