III. $2003$ Budgets $-$ prepared in December $2002.$

$2003$ Revenue Budget

Estimated $2003$ production and sales

Estimated $2003$ average selling price

Budgeted revenues$2003$ Revenue Budge

IV$.$ Management stock option compensation plan.

The management team of Western Chipsets has been historically well compensated. An

important component of compensation, designed to retain talent and to force managers to

behave as owners, has been a significant stock$-$option grant to managers. The grant of

options has been tied to certain annual firmwide performance targets. These triggers

were generally set to be achievable $-$ the firm had met them every year through $2002.$

Based on the $2003$ budgets, the compensation committee of the Western Chipsets' board

of directors set a stock option compensation plan for managers of the firm. The plan

guaranteed substantial grants of in$-$the$-$money stock options to all levels of the

management team as long as the firm's net income for $2003$ exceeds the $$100,000,000$

level.

V$.2003$ Preliminary results $-$ prepared on December $3,2003.$

The top management team of Western Chipsets examined the firm's operations through

the first $11$ months of $2003$ on December $3.$ The actual results and the estimates for

December $2003$ are below.

The December estimates were prepared based on the number of firm orders received by

the firm for delivery in the month of December. No further orders were anticipated.

The direct materials and direct labor costs were prepared based on the actual average unit

DM and DL usage through November $($$$4\mathrm{.}47$ and $$1\mathrm{.}21,$ respectively$).$ These were

expected to be essentially the same in December.

Finally, overhead and G&A amounts for December were prepared using all of the

payments scheduled to be made for equipment leases, facility leases, taxes, and other

G&A amounts. Western Chipsets could not postpone paying for any of these items. All

overhead and G&A costs are fixed $-$ they do not go up or down with the number of units,

at least not in the short run.

Not surprisingly, the management team was extremely disappointed after reviewing the

above figures. After what was generally believed to be a good year given the competitive

environment the management appeared to be destined to miss the $$100,000,000$ option

grant trigger for the first time in the firm's history.

Western Chipsets' CEO called an executive meeting to discuss the situation and solicited

proposals from the management team on how to proceed. One thing was immediately

clear: there was absolutely no way the company could increase December sales.

At the meeting, Western Chipsets' controller proposed increasing December production

beyond expected sales and inventorying unsold units. The controller claims that this will

increase the company's GAAP net income.

How many units must be produced and inventoried for Western Chipsets to exactly

meet the $$100,000,000$ option trigger?

Please solve this using the absorption method