Jason Higgins, the new plant manager of Old Lake Manufacturing Plant Number 7, has just reviewed a draft of his year-end financial statements. Higgins receives a year-end bonus of 12% of the plant's operating income before tax. The year-end income statement provided by the plant's controller was disappointing to say the least. After reviewing the numbers, Higgins demanded that his controller go back and "work the numbers" again. Higgins insisted that if he didn't see a better operating income number the next time around he would be forced to look for a new controller. i (Click the icon to view additional data.) Read the requirements. Requirement 1. Show numerically how operating income would improve by $1,200,000 just by classifying the preceding costs as product costs instead of period expenses. Begin by determining the formula to compute how the controller was able to improve operating income, then enter the appropriate amounts and compute the increase in operating income. Increase in operating income Requirement 2. Is Higgins correct in his justification that these costs "are definitely related to our product"? The controller classified as correct in his justification with respect to classifying costs as product or period costs; this determination is made by and be Requirement 3. By how much will Higgins profit personally if the controller makes the adjustments in requirement 1? if the controller makes the adjustments. Jason Higgins will profit personally by Requirement 4. What should the plant controller do? The controller reclassify costs as Research and development, as well as all costs related to warehousing and distribution of goods, should be so the plant manager can reap short-term benefits. The idea of correctly classifying costs is to properly reflect on the those costs that are directly related to manufacturing and to properly reflect on the those costs that will provide a future benefit. More info Old Lake Manufacturing classifies all costs directly related to the manufacturing of its product as product costs. These costs are inventoried and later expensed as costs of goods sold when the product is sold. All other expenses, including finished goods warehousing costs of $3,480,000, are classified as period expenses. Higgins had suggested that warehousing costs be included as product costs because they are "definitely related to our product." The company produced 290,000 units during the period and sold 190,000 units. As the controller reworked the numbers he discovered that if he included warehousing costs as product costs, he could improve operating income by $1,200,000. He was also sure these new numbers would make Higgins happy.