High Energy Co manufactures heave duty battery for special use and mostly relies on Government contracts and some other specialized channels. Recently High Energy has hired a CEO who has agreed to join the company based on a lower salary but with a bonus clause on Net Income. The company called it the profit sharing scheme whereby the CEO will receive 10% of the net income. The Energy Company uses the usual absorption costing system. The new CEO, Jack Hansen, called a meeting with all the department head to assess the capacity, operations and the market. After the meeting Jack asked the accountant to coordinate with all the department head and to produce a budget for the next year. The sales manager convinced Lisa that the planned ending inventory will be necessary and adequate to respond to possible sales growth during the year end.

The accountant, Lisa Shy collected the following information:

Beginning Inventory (units) 0

Production 8000

Sales 6000

Selling Price ($) 1000

Variable Manufacturing Cost per unit

Direct Material 110

Direct Labor 40

Manufacturing Overhead 200

Variable Marketing Cost per unit 185

Fixed Manufacturing Overhead Costs 1,080,000

Fixed Marketing costs 1,380,000

Required:

1. What is the Income Budget that Lisa will prepare for the year? (1 Point)
2. The CEO, Jack reviewed the budget and decided that the production of 8000 was not sufficient to incentivize the sales team by the way of maintaining the pressure on them. He suggested instead to plan for a production of 10,000 pieces to the owner, Tom Swift, to which he agreed. What would be the income projection under the new plan? (1 point)
3. At the end of the year, the production was 10,000 but sales was equal to 6000 pieces. Jack was proud of his achievement of meeting targets and left the firm on a sound footing to accept another job to face the new challenge. The owner, Tom Swift was not very sure that the firm is where it should be. He didnt understand why his new CEO although achieved the targeted income projected, he was not sure of the ending inventory of 4000 pieces, which represented over six months of sale. Tom has asked his auditor to explain to him what happened and the auditor confirmed that all the numbers are accurate.

Imagine Tom has hired you as a consultant to advise him as to what happened and what can he do going forward. Tom has no accounting background but is otherwise a educated person, having done his undergraduate in engineering in a World class University. How will you explain the problem to him and what will you advise? (2 points)