Michael Cohen is a factory manager at Company XYZ that manufactures refrigerators. For the sake of simplicity, suppose:

Manufacturing costs for a new QR31 refrigerator consist entirely of fixed manufacturing overhead costs ($5,000 regardless of the production level).

Michael receives a year-end bonus of 10% on the plants net income.

A company focus group indicates initial sales for the QR31 refrigerator in the next year will be 1 unit for $1,000.

Michael must decide how many units of the new refrigerator (QR31) to produce next year. Michael is considering 2 options:

OPTION 1 - Produced 1 unit; sold 1 unit

OPTION 2 - Produced 5,000 units; sold 1 unit

Because Michael is not very comfortable with numbers, he consults with his personal accountant (you) about what he should choose.

QUESTION:

How will each option impact the income statement of Company XYZ?

How will each option impact Michael's end of year bonus?

Which option would maximize Michael's wealth?

Explain your answer as though you are talking to Michael, your client.