Chapter 3 Case Study

Jared Lyon and Chelsa Reynolds work in the Assembly Division of RiteCorp Manufacturing. They have many plants across the nation. Chelsa manages a plant in Louisville, KY and Jared manages a plant in Tucson, AZ. They are paid a salary and are guaranteed a bonus of 10% of their salary if their division meets or exceeds production goals for the year. Ritecorp operates on a calendar year end. Near the end of the month, Jared phones Chelsa and tells her that they are within 30,000 equivalent units of making their goal. He informs her that they would definitely meet this goal if she would change her percentage of completion number on her ending work in process.

Chelsa is hesitant. She has already forwarded a preliminary estimate of the percentage completion numbers to corporate headquarters. Jared pressures her, telling her the managers of all the other plants will be doing this (slight adjustments) so they can all get their bonus checks.

1. What should Chelsa do?

2. What is the impact of changing the percentage of completion number given the following for Chelsas plant:

a. 270,000 units were transferred in from the previous department at a cost of $50,689,000.

b. No materials were added in the Assembly departments.

c. Conversion costs incurred in the Assembly department were $20,689,400.

d. Chelsa estimates that the units will be 25% complete as to conversion costs at the end of the year.

e. What is the effect of changing this to 30%? What happens to profit this year? Next year?

f. This is only one plant. How many plants are in the division?