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ETHICS CHALLENGE L07-29 IM Carlos Cavalas, the manager of Echo Product Brazilian Division, is trying to set the production schedule for the last quarter of the year. The Brazilian Division had planned to sell 3.600 units during the year, but by September 30 only the following activity had been reported Inventory, January Production Sales Inventory, September 30 Units 0 2.400 2000 400 The division can rest warehouse space to store up to 1,000 units. The minimum inventory level that the division should carry is 50 units, Mr. Cavalas is aware that production must be at least 200 units per quarter in order to retain a nucleus of key employees. Maximum production capacity is 1.500 units per quarter Demand has been soft, and the sales forecast for the last quarter is only 600 units. Due to the nature of the division's operations, fixed manufacturing overhead is a major element of product cost Required: 1. Assume that the division is using variable costing How many units should be scheduled for production during the last quarter of the year? (The basic formula for computing the required production for the quarter is: Required production = Expected sales + Desired ending inventory - Beginning inventory) Show computations and explain your answer. Will the number of units scheduled for production affect the division's reported income or loss for the year? Explain 2. Assume that the division is using absorption conting and that the divisional manager is given an annual bonus based on divisional operating income. Ir Me Cavatas wants to maximize his division's operating income for the year, how many units should be scheduled for production during the last quarter? See the formula in (1) above Explain 3. Identify the ethical issues involved in the decision Mr. Cavalar must make about the level of production for the last quarter of the year