Kennedy Company makes and sells designer handbags and the production manager is assessing the production level to execute for the upcoming year. Budgeted sales are $20,000$ units and Kennedy uses absorption costing. and the production manager is considering $20,000,25,000$ or $30,000$ units of production. There is no beginning inventory for the year.

The average selling price is $$220$ per unit with variable production costs of $$120$ per unit and fixed production cost of $$550,000$ per year.

Required:

Calculate the expected gross margin for each of the production levels that the production manager is considering. $(6$ marks$)$

If the production manager is compensated on a percentage of gross margin, what production level will they be motivated to make? $(2$ marks$)$

What is the impact of the bonus structure in place and what recommendations might you make to improve it$?(2$ marks$)$

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B

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