Carlos Cavalas, the manager of Echo Products' Brazilian division, is trying to sell the production schedule for the last quarter of the year. The Brazilian division has plans to sell 3,600 units during the year, but by September 30 only the following activity has been reported:

UnitsInventory, January 1 0Production2,400Sales2,000Inventory, September 30400

The division can rent warehouses space to store up to 1,000 units. The minimum inventory level that the division should carry is 50 units. Mr. Cavales is aware that production must be at least 200 units per quarter in order to retain a nucleus of key employees. Maximum production capacity is 1,500 units per quarter.

Demand has been soft and sales forecast for the last quarter is only 600 units. Due to the nature of the division's operations, fixed manufacturing overhead is a major element of the production cost.

Required:

1. Assume that the division is using variable costing. How many units ahould be scheduled for production during the last quarter of the year? (The basic formula for comptuing the required production for the quarter is: Required production = Excpected sales + Desired ending inventory - Begining inventory.) Show computations and explain your answer. Will the number of units scheduled for production affect the division's reported income or loss for the year? Explain.
2. Assume the division is using absorption costing and that the divisional manager is given an annual bonus based on divisinal operating income. If Mr. Cavalas wants to maximize his division's operating income for the year, how many units should be scheduled for production during the last quarter. Explain.
3. Identify the ethical issues involved in the decision Mr. Cavalas must make about the level of production for the last quarter of the year.