David Wong, the product manager of KiKi Company, was reviewing the production schedule for the last quarter of 2020. He noted that the company planned to sell 4,000 units during the year and keep a minimum closing inventory level at 100 units on 31 December 2020. As at 30 September 2020, the following data was reported.

Units

Inventory, 1 January 2020 0

Production 3,000

Sales 2,700

Inventory, 30 September 2020 300

At the beginning of the year, the company rented a warehouse that could store its inventory up to 1,250 units. The company had a maximum production capacity of 2,300 units per quarter.

Required:

(a) Assume that KiKi Company adopted marginal costing, (i) what is the minimum units that the company should produce during the last quarter of 2020?

(ii) will the number of units produced affect the companys profit or loss for the year? Explain.

(b) Assume that the company adopted absorption costing and David was given an annual bonus based on the companys reported profit. If David wanted to maximize his bonus in 2020, how many units would he produce? Explain.

(c) Advise the management of the company on the costing method that should be chosen to determine Davids bonus?