Ethics: Increasing Production to Boost Profit. Hauser Company produces heavy machinery used for snow removal. Over half of the production costs incurred by Hauser are related to fixed manufacturing overhead. Although the company has maximum production capacity of 20,000 units per year, only 2,000 units were produced and sold during year 1, yielding $25 million in operating losses. As required by U.S. GAAP, the company uses absorption costing.

At the beginning of year 2, the board of directors fired the president of the company and began searching for a new president who was willing to make substantial changes to get the company turned around. One candidate, Paul Glezner, indicated he could turn the company around within a year. He felt the company was producing too few products, and could benefit from increased production. The members of the board of directors were impressed and considered Pauls contract demands: $10,000 in base annual salary, plus 30 percent of operating profit. Paul made it clear he would help the company for year 2, but intended to move on after the year ended.

Management of Hauser Company approached you with Pauls offer and asked you to determine whether the offer is reasonable.

Required:

Assume the companys sales will remain close to 2,000 units in year 2. How does Paul intend to turn the company around during year 2?

Why do you think Paul insists on leaving the company after year 2?

What type of costing system would you recommend Hauser Company use during year 2? Explain.