Kelly Klarkson and Karrie Underwood are production managers in the Appliances Division of Muzak Corporation, which has several dozen plants scatted in locations throughout the world. Karrie manages the plant located in Edmonton, while Kelly manages the plant in Red Deer. Production managers are paid a salary and get an additional bonus equal to \10 of their base salary if the entire division meets or exceeds its target profits for the year. The bonus is determined in March after the company's December 31 annual report has been prepared and issued to shareholders. In late February, Karrie received a phone call from Kelly that went something like this: Kelly: I just got the preliminary net profit figures for the division for last year and we are within \\( \\$ 6,000 \\) of making the year's target profits. All we have to do is pull a few strings, and we'll be over the top. Karrie: What do you mean? Kelly: Well, one thing that would be easy to change is your estimate of the percentage of completion of your ending work in process inventories. Karrie: I don't know if I can do that. Those percentage completion numbers are supplied by Simon Kowell, the production manager. He sends the numbers directly to Randy Jackson the Division President. I have always trusted Simon to provide us with good estimates. Kelly: \\( \\quad \\) You can always tell them there was a mistake. Think about it Karrie. All of us managers are doing as much as we can to get this bonus. I've already made some adjustments in my division that no one is going to notice. Karrie: What did you do, if you don't mind me asking? Kelly: \\( \\quad \\) As I thought this was going to be an issue I had our production doubled for the last quarter. We only needed to produce 75,000 units but I had the production increased to 150,000 . I knew none of our variable costs per unit would change and our fixed costs in total would stay the same, so it wasn't a big deal. Sure we have more inventory at year end, but I'll just decrease production next quarter. The final processing department in Karrie's production facility: - Began the year with no work in process or finished goods inventories. - During the year, 270,000 units were transferred in from the prior processing department. - 250,000 units were completed and sold. - Costs transferred in from the prior department totalled \\( \\$ 540,000 \\). - No materials are added in the final processing department. - A total of \\( \\$ 1,020,000 \\) of conversion costs were incurred in the final processing department during the year. Muzak Corporation uses the FIFO method for inventory costing. Simon Kowell estimated that the units in ending inventory in the final processing department were \25 complete with respect to conversion costs. Kelly's department has variable costs of \\( \\$ 10 \\) per unit and total fixed costs of \\( \\$ 50,000 \\) per quarter. Some things to calculate/consider: - \\( \\quad \\) Simon Kowell estimated that the units in ending inventory in the final processing department were \25 complete with respect to conversion costs. If this estimate of the percentage of completion is used, what would be the cost of goods sold for the year? - What percentage completion figure would result in increasing the reported operating income by the \\( \\$ 6,000 \\) that Kelly has noted? - Do you think that Karrie should alter the estimate of percentage of completion of closing work in process? - What do you think of Kelly's creative way of increasing income? How does increasing production increase net profit of the company? How much did net profit increase from this increase in production? Required: Prepare a report to Karrie. Answer the above calculations/considerations. Please provide detailed discussion of what she should do. Kelly Klarkson and Karrie Underwood are production managers in the Appliances Division of Muzak Corporation, which has several dozen plants scatted in locations throughout the world. Karrie manages the plant located in Edmonton, while Kelly manages the plant in Red Deer. Production managers are paid a salary and get an additional bonus equal to \10 of their base salary if the entire division meets or exceeds its target profits for the year. The bonus is determined in March after the company's December 31 annual report has been prepared and issued to shareholders. In late February, Karrie received a phone call from Kelly that went something like this: Kelly: I just got the preliminary net profit figures for the division for last year and we are within \\( \\$ 6,000 \\) of making the year's target profits. All we have to do is pull a few strings, and we'll be over the top. Karrie: What do you mean? Kelly: Well, one thing that would be easy to change is your estimate of the percentage of completion of your ending work in process inventories. Karrie: I don't know if I can do that. Those percentage completion numbers are supplied by Simon Kowell, the production manager. He sends the numbers directly to Randy Jackson the Division President. I have always trusted Simon to provide us with good estimates. Kelly: \\( \\quad \\) You can always tell them there was a mistake. Think about it Karrie. All of us managers are doing as much as we can to get this bonus. I've already made some adjustments in my division that no one is going to notice. Karrie: What did you do, if you don't mind me asking? Kelly: \\( \\quad \\) As I thought this was going to be an issue I had our production doubled for the last quarter. We only needed to produce 75,000 units but I had the production increased to 150,000 . I knew none of our variable costs per unit would change and our fixed costs in total would stay the same, so it wasn't a big deal. Sure we have more inventory at year end, but I'll just decrease production next quarter. The final processing department in Karrie's production facility: - Began the year with no work in process or finished goods inventories. - During the year, 270,000 units were transferred in from the prior processing department. - 250,000 units were completed and sold. - Costs transferred in from the prior department totalled \\( \\$ 540,000 \\). - No materials are added in the final processing department. - A total of \\( \\$ 1,020,000 \\) of conversion costs were incurred in the final processing department during the year. Muzak Corporation uses the FIFO method for inventory costing. Simon Kowell estimated that the units in ending inventory in the final processing department were \25 complete with respect to conversion costs. Kelly's department has variable costs of \\( \\$ 10 \\) per unit and total fixed costs of \\( \\$ 50,000 \\) per quarter. Some things to calculate/consider: - \\( \\quad \\) Simon Kowell estimated that the units in ending inventory in the final processing department were \25 complete with respect to conversion costs. If this estimate of the percentage of completion is used, what would be the cost of goods sold for the year? - What percentage completion figure would result in increasing the reported operating income by the \\( \\$ 6,000 \\) that Kelly has noted? - Do you think that Karrie should alter the estimate of percentage of completion of closing work in process? - What do you think of Kelly's creative way of increasing income? How does increasing production increase net profit of the company? How much did net profit increase from this increase in production? Required: Prepare a report to Karrie. Answer the above calculations/considerations. Please provide detailed discussion of what she should do