Montevideo Manufacturing, Inc. produces a single type of small motor. Thebookkeeper who does not have an in-depth understanding of accountingprinciples prepared the following performance report with the help of theproduction manager.In a conversation with the sales manager, the production manager wasoverheard saying, You sales guys really messed up our May performance,and it is only because production did such a great job controlling costs thatwe arent in even worse shape.

1. Do you agree with the production manager that the manufacturing areadid a good job of controlling costs?2. Prepare a flexible budget for Montevideo Manufacturings expenses atthe following activity levels: 45,000 units, 50,000 units, and 55,000 units.3. Prepare a revised performance report, using the most appropriate flexi-ble budget from (2) above.

4. Now what is your response to the production managers claim?5. Assume that you have just been hired as the new accountant. Youobserve that the production manager is about to receive a large bonusbased on the favorable materials, labor, and factory overhead variancesindicated in the flexible budget prepared by the bookkeeper. Using theIMA Statement of Ethical Professional Practice as your guide, what stan-dards, if any, apply to your responsibilities in this matter?

D E Variance Master Budget (50,000 units) $1,250,000 $125,000U A B 1 Montevideo Manufacturing, Inc. 2 Performance Report 3 For the Month Ended May 31, 2016 4 5 Flexible Budget Actual Results 6 Per Unit (45,000 units) 7 Sales $25.00 $1,125,000 8 Less variable expenses: 9 Direct materials 4.50 $212,500 10 Direct labor 3.75 175,750 11 Variable factory overhead 2.25 110,250 12 Variable selling and administrative expense 1.50 70,500 13 Total variable expense $12.00 $569,000 14 Contribution margin $13.00 $556,000 15 Less fixed expenses: 16 Fixed factory overhead expense $100,000 $95,000 17 Fixed selling and administrative expense 150,000 160,000 18 Total fixed expense $250,000 $255,000 19 Income from operations $301,000 $225,000 187,500 112,500 75,000 $600,000 $650,000 $12,500 F 11,750 F 2,250 F 4,500 F $31,000 F $94,000U $100,000 150,000 $250,000 $400,000 $5,000 F 10,000U $5,000U $99,000U