CASE 420 Ethics and the Manager, Understanding the Impact of Percentage Completion on Profit Weighted-Average Method [Course Objective B] Gary Stevens and Mary James are production managers in the Consumer Electronics Division of General Electronics Company, which has several dozen plants scattered in locations throughout the world. Mary manages the plant located in Des Moines, Iowa, while Gary manages the plant in El Segundo, California. Production managers are paid a salary and get an additional bonus equal to 5% of their base salary if the entire division meets or exceeds its target profits for the year. The bonus is determined in March after the companys annual report has been prepared and issued to stockholders. Shortly after the beginning of the New Year, Mary received a phone call from Gary that went like this: Gary: Hows it going, Mary? Mary: Fine, Gary. Hows it going with you? Gary: Great! I just got the preliminary profit figures for the division for last year and we are within $200,000 of making the years target profits. All we have to do is pull a few strings, and well be over the top! Mary: What do you mean? Gary: Well, one thing that would be easy to change is your estimate of the percentage completion of your ending work-in-process inventories. Mary: I dont know if I can do that, Gary. Those percentage completion figures are supplied by Tom Winthrop, my lead supervisor, whom I have always trusted to provide us with good estimates. Besides, Ive already sent the percentage completion figures to corporate headquarters. Gary: You can always tell them there was a mistake. Think about it, Mary. All of us managers are doing as much as we can to pull this bonus out of the hat. You may not want the bonus check, but the rest of us sure could use it.

IMPORTANT DATA FOR THIS PROBLEM: The processing area under Marys supervision started the year with 50,000 units in beginning WIP. During the year, 160,000 units were transferred in from the prior processing department and 200,000 units were completed and sold . Costs transferred in from the prior department totaled $39,375,000 ($30,000,000 in conversion value and $9,375,000 in materials value). A total of $20,807,500 in costs ($18,000,000 in conversion costs and $2,807,500 in materials costs) were incurred in Marys area during the period. Required: 1. Tom Winthrop, the lead production supervisor, estimated that the units in ending inventory in Marys area were 30% complete with respect to conversion costs, and all materials had been completely inserted in the process. If this estimate of the percentage completion is used, what would be the Cost of Goods Sold for the year? (Note: Since all units completed were also sold, in this case the cost of goods transferred out = Cost of Goods Sold.) 2. Gary is recommending that the completion percentage be adjusted by 10 percentage points in order to assist the team in making their bonus.

a. Calculate the Cost of Goods Sold if the ending inventory is 20% complete with respect to conversion costs. Would net income increase or decrease if this option were chosen over the original estimate of 30% completion percentage? How much is the increase or decrease?

b. Calculate the Cost of Goods Sold if the ending inventory is 40% complete with respect to conversion costs. Would net income increase or decrease if this option were chosen over the original estimate of 30% completion percentage? How much is the increase or decrease?

c. Based on your calculations, which percentage would you guess Gary is suggesting that Mary use for her ending inventory estimate?

3. Do you think Mary should go along with the request to alter estimates of the percentage completion for her production area at the end of the period? Why or why not? Deliverables:

Submit an Excel spreadsheet that documents the calculations made for Steps 1 and 2 above. All items should be clearly labeled, and appropriate formulas should be used to perform your calculations.