Campus Press produces textbooks for high school accounting courses. The company recently hired a new editor, Jean Green, to handle production and sales of books for an introduction to accounting course. Jean's compensation depends on the gross margin associated with sales of this book. Jean needs to decide how many copies of the book to produce. The following information is available for the fall semester 2017:

Estimated sales 22,000 books Beginning inventory 0 books Average selling price $81 per book Variable production costs $51 per book Fixed production costs $418,000 per semester The fixed-cost allocation rate is based on expected sales and is therefore equal to $ 418 comma 000/22 comma 000 books = $ 19 per book.

Jean has decided to produce either 22,000, 27,500, or 29,700 books.

REQUIREMENTS:

1. Calculate expected gross margin if Jean produces 22,000, 27,500, or 29,700 books. (Make sure you include the production-volume variance as part of cost of goods sold.)

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 inspired to produce a product in excess of demand to maximize their own bonus. There are metrics to discourage managers from producing products in excess of demand. Do you think the following metrics will accomplish this objective? Show your work. a. Incorporate a charge of 10% of the cost of the ending inventory as an expense for evaluating the manager. b. Include nonfinancial measures when evaluating management and rewarding performance.

1. Calculate expected gross margin if Jean produces 22,000, 27,500, or 29,700 books. (Make sure you include the production-volume variance as part of cost of goods sold.) Calculate the gross margin for each level of production. Begin with 22,000 books, then 27,500 books, and lastly 29,700 books. (Enter a "0" for any zero balance accounts. If an account does not have a variance, do not select a label.)

Requirement 1

	22,000 Books	27,500 Books	29,700 Books
Revenues
Cost of goods sold
Production - volume variance (U/F?)
Net Cost of Goods Sold
Gross Margin

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

Requirement 2

	22,000 Books	27,500 Books	29,700 Books
Beginning Inventory
Production
Sales
Ending Inventory
Cost Per Book
Cost of Ending Inventory

Requirement 3: Managers who are paid a bonus that is a function of gross margin may be inspired to produce a product in excess of demand to maximize their own bonus. There are metrics to discourage managers from producing products in excess of demand. Do you think the following metrics will accomplish this objective? Show your work.

a. Incorporate a charge of 10% of the cost of the ending inventory as an expense for evaluating the manager.

	22,000 books	27,500 books	29,700 books
Gross Margin
Ending inventory charge
Adjusted gross margin

Do you think the metric would accomplish the objective of discouraging managers from producing products in excess of demand?

Adjusting for ending inventory __________(Options: Does not, Does to some degree, will always) mitigate the increase in inventory associated with excess production. Therefore, it may be_______(Options: Difficult, easy) to mechanically compensate for all of the increased income. In addition, it _________(Options: does nothing to hold the manager responsible for the poor decisions, rewards the manager for increasing production which is a good decision) from the organization's standpoint.

b. Include nonfinancial measures when evaluating management and rewarding performance.

One nonfinancial measure is to compute the excess production ratio. Determine the formula, then compute the ratio at each production level.

# of books Production / Sales = Excess production ratio

	Production /	Sales Units	=Excess Production Ratio
22,000			=
27,500			=
29,700			=

A ratio of ending inventory to beginning inventory is _______(Options: Not Possible, Possible)

The non-financial measures ________(Options: are only needed if we don't use the inventory metric. ,must be incorporated into the reward function of the manager to be useful.)