Estimated sales 19,000 books Beginning inventory 0 books Average selling price $83 per book Variable production costs $48 per book Fixed production costs $285,000 per semester The fixed-cost allocation rate is based on expected sales and is therefore equal to $285,000/19,000 books = $15 per book. 4. Northern Press produces textbooks for high school accounting courses. The company recently hired a new editor, Jean Green, to handle production and sales of books for an introduction to accounting course. Jean's compensation depends on 9 the gross margin associated with sales of this book. Jean needs to decide how many copies of the book to produce. The following information is available for the fall semester 2017: Click the icon to view the information.) Jean has decided to produce either 19,000, 26,600, or 28,500 books. Read the requirements Requirement 1. Calculate expected gross margin it Jean produces 19.000, 26,600, or 28,500 books. (Make sure you include the production-volume variance as part of cost of goods sold.) Calculate the gross margin for each level of production. Begin with 19,000 books, then 26,600 books, and lastly 28,500 books. (Enter a "O" for any zero balance accounts. If an account does not have a variance, do not select a label.) 19,000 books 25,600 books 28,500 books Revenues Cost of goods sold (2) (3) Production-volume variance Net cost of goods sold Gross margin Requirement 2. Calculate ending inventory in units and in dollars for each production level. (Complete all answer boxes. For amounts with a "0 unit or dollar balance, make sure to enter" in the appropriate coll.) 19,000 books 26,600 books 28,500 books Beginning Inventory books books books Production Sales Ending Inventory books books books Cost per book Cost of ending inventory Requirement 3. Managers who are paid a bonus that is a function of gross margin may be inspired to produce a product in excess of demand to maximize their own bonus. There are metrics to discourage managers from producing products in excess of demand. Do you think the following metrics will accomplish this objective? Show your work. a. Incorporate a charge of 5% of the cost of the ending inventory as an expense for evaluating the manager. (Complete all answer boxes. For a 50 change, make sure to enter in the appropriate cell.) 19,000 books 25,600 books 28,500 books Gross margin Ending Inventory charge Adjusted gross margin Do you think the metric would accomplish the objective of discouraging managers from producing products in excess of demand? Adjusting for ending inventory (4) mitigate the increase in inventory associated with excess production Therefore, it may be (5) to mechanically compensate for all of the increased income. In addition, it (6) from the organization's standpoint b. Include nonfinancial measures when evaluating management and rewarding performance. One nonfinancial measure is to compute the excess production ratio. Determine the formula, then compute the ratio at each production level. (Round the ratios to two decimal places.) (8) Excess production ratio # of books 19,000 1 26,600 28,500 The non-financial measures (10) A ratio of ending inventory to beginning inventory is (9) 1: More Info Estimated sales 19,000 books Beginning inventory O books Average selling price $83 per book Variable production costs $48 per book Fixed production costs $285,000 per semester The fixed-cost allocation rate is based on expected sales and is therefore equal to $285,000/19,000 books = 515 per book 2: Requirements 1. Calculate expected gross margin if Jean produces 19.000, 26,600, or 28,500 books. (Make sure you include the production-volume variance as part of cost of goods sold.) 2. Calculate ending inventory in units and in dollars for each production level. 3. Managers who are paid a bonus that is a function of gross margin may be inspired to produce a product in excess of demand to maximize their own bonus. There are metrics to discourage managers from producing products in excess of demand. Do you think the following metrics will accomplish this objective? Show your work Incorporate a charge of 5% of the cost of the ending inventory as an expense for evaluating the manager. b. Include nonfinancial measures when evaluating management and rewarding performance. (5) difficult (2) O (3) O OF OF OF OU OU (4) O does not O does to some degree will always o easy OU (6) O does nothing to hold the manager responsible for the poor decisions rewards the manager for increasing production which is a good decision O Sales units Sales units (7) O Beginning inventory units Ending inventory units O Production units (8) O O Beginning inventory units O Ending inventory units O Production units (9) not possible since beginning inventory was 0. A change in inventory level can be used instead. possible since there was beginning inventory. (10) O are only needed if we don't use the inventory metric. O must be incorporated into the reward function of the manager to be useful