Hamilton Semiconductors manufactures specialized chips that sell for $20 each. Hamiltons manufacturing costs consist of variable costs of $2 per chip and fixed costs of $9,000,000. Hamilton also incurs $400,000 in fixed marketing costs each year.

Hamilton calculates operating income using absorption costingthat is, Hamilton calculates manufacturing costs per unit by dividing total manufacturing costs by actual production. Hamilton costs all units in inventory at this rate and expenses the costs in the income statement at the same time when the units in inventory are sold. The next year, 2020, appears to be a difficult year for Hamilton. It expects to sell only 500,000 units. The demand for these chips fluctuates considerably so Hamilton usually holds minimal inventory.

REQUIRED:

1. Calculate Hamiltons operating income in 2020 if Hamilton manufactures (a) 500,000 units and, (b) 600,000 units.

2. Would it be unethical for Randy Jones, the general manager of Hamilton Semiconductors, to produce more units than can be sold in order to show better operating results? Joness compensation has a bonus component based on operating income. Explain your answer.

3. Would it be unethical for Jones to ask distributors to buy more product than they need? Hamilton follows the industry practice of booking sales when products are shipped to distributors. Explain your answer.