Ellory Clawson, the sales manager of Long Beach Luxury Beach Furniture, is growing concerned that the division will not be able to meet its current period income objectives. Meeting the income objectives means all managers receive a 3% bonus.

The division uses absorption costing for internal profit reporting and had an appropriate level of inventory at the beginning of the period. Ellory determines that profits can be boosted by increasing production by 30% at the end of the period. The increased production will allocate fixed costs over a greater number of units, reducing cost of goods sold and increasing earnings. Unfortunately, it is unlikely the additional production will be sold during this period, resulting in a large ending inventory balance. The furniture will be sold in the next period, but the company would need to pay additional money to store the extra furniture.

The production manager, Mr. Kento Au, meets monthly with Ellory to determine exactly how much production is needed to meet sales projections. The meeting is this afternoon and Ellory is conflicted. If she tells Kento to increase production by 30%, it will mean the company will produce too many units this period and incur additional storage costs. If she tells Kento that no additional production is needed, they will miss their profit projections and the managers will not receive their 3% bonus.

1. Discuss the pros and cons of both options. Include a discussion of ethics around the increased cost of storage the company will pay if more units are produced.
2. How will this impact operating income and inventory if absorption costing concepts are used?
3. What option would you choose and why?