P$14-46.$ Adjusting income for ROI purposes; ethics Imelda Sanchez, manager of the Arias Division of Ponc$$ Chemical, is evaluated based on the division's return on investment and residual income. Near the end of November $2020,$ she was reviewing the division's financial information as well as some activities projected for the remainder of the year. The information she was reviewing follows.

Annual sales were projected at $100,000$ units, each with a selling price of $$30.$ Sanchez has received a purchase order from a new customer for $5,000$ units. The purchase order states that the units should be shipped on January $3,2021,$ for arrival on January $5.$

The division's $2020$ beginning inventory was $500$ units, each with a cost of $$11.$ Purchases of $99,500$ units have been made steadily throughout the year, and the per$-$unit cost has been constant at $$10.$ Sanchez intends to make a purchase of $5,200$ units before year$-$end, providing a $200-$unit balance in inventory after making the shipment to the new customer. Carrying costs for the units are quite high, but ordering costs are extremely low. The division uses a last$-$in$,$ first$-$out $($LIFO$)$ cost flow assumption for inventory.

Shipping expenses are $$0\mathrm{.}50$ per unit sold.

Sanchez has just received a notice from her primary supplier that he is going out of business and is selling his remaining stock of $15,000$ units for $$9$ each. She makes a note to herself to place her final order for the year from this supplier.

Division advertising is $$5,000$ per month for newspaper inserts and television spots. No advertising has yet been purchased for December, but Sanchez intends to have her sales manager call the paper and TV station early next week.

Salaries through the end of the year are projected at $$700,000.$ This amount assumes that the position to be vacated by the division's personnel manager will be filled on December $1.$ The personnel manager's job pays $$66,000$ per year. Sanchez has an interview on Monday with an individual who appears to be a good candidate for the position.

Other general and administrative costs for the full year are estimated to total $$590,000.$

As Sanchez was reviewing the divisional information, she received a phone call from the division's maintenance supervisor. He informed her that $$10,000$ of electrical repairs to the office heating system are necessary. When asked if the repairs were essential, the supervisor replied, $"$No$,$ the office won't burn down if you don't make them, but they are advisable for energy efficiency and long$-$term operation of the system." Sanchez tells the supervisor to see her on Monday at $8$:$00$ A$.$M$.$

Using her information, Sanchez prepared a budgeted income statement and was fairly pleased with the division's results. Although providing the $13$ percent rate of return on investment desired by corporate management, the results did not reach the $16$ percent rate needed for Sanchez to receive a bonus for the year.

a$.$ Prepare a $2020$ budgeted income statement for the Arias Division. Determine the division's residual income, assuming that the division has an asset investment base of $$4,500,000.$

b$.$ Sanchez's less$-$than$-$scrupulous friend, John Greer, walked into the office at this time. When he heard that she was not going to receive a bonus, Greer said, "Here, let me take care of this for you." He proceeded to recompute the budgeted income statement and showed Sanchez that, based on his computation of $$723,000$ in income, she would receive her bonus. Prepare Greer's budgeted income statement.

c$.$ What future difficulties might arise if Sanchez acts in a manner that will make Greer's pro forma income statement figures a reality?