Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Please help! I'm struggling with part 1 and 2 of this question. Please don't copy an answer already posted on other similar Chegg questions. The

  • Please help! I'm struggling with part 1 and 2 of this question. Please don't copy an answer already posted on other similar Chegg questions.

  • The board of directors of Mesa Verde Tool Company set the profit goal for calendar year 2016 at $2,200,000. It also established a bonus plan in which the top five officers of the company will share $150,000 if the profit goal is met or exceeded. If the goal is not met, there is no bonus. T. J. Elias, the chief financial officer and one of the top five executives, prepared the following budgeted income statement for 2016, based on the boards profit directive:

    image text in transcribed

    By late September, it became apparent that sales were running below forecast and that annual sales would approximate 450,000 units, for an estimated net income of $1,230,000 and no bonus. In an executive committee strategy meeting, Bob Wrangell, vice president of Manufacturing, suggested that the production capacity was available to produce the entire 500,000 units or more, even if that sales level could not be reached. He remembered a presenter, from a seminar that he recently attended, describing how net income could be increased by producing more than can be sold. He urged Elias to determine how many extra units they would need to produce to achieve the profit goal and, thus, earn the bonus.

    REQUIRED:

    1. If sales only reach 450,000 units for the year, how many additional units would have to be produced, given the current selling price and cost structure, to meet the budgeted profit of $2,200,000?

    2. Prepare an absorption costing income statement to prove your answer above.

    3. What ethical responsibility, if any, does Elias have in this situation?

    4. What is there about the bonus plan that potentially encourages unethical behavior?

Mesa Verde Tool Company Budgeted Income Statement For the Year Ended December 31, 2016 Sales (500,000 units). $15,000,000 Cost of goods sold: Beginning inventory... $ -0- Cost of goods manufactured.... 8,000,000 Cost of goods available for sale $8,000,000 Ending inventory.... 8,000,000 Gross margin ........ $ 7,000,000 Selling and administrative expenses: Variable selling and administrative.... $2,800,000 Fixed selling and administrative .. 2,000,000 4,800,000 Net operating income ..... $ 2,200,000 *Variable manufacturing: 500,000 units x $5 per unit = $2,500,000; Fixed manufacturing: $5,500,000

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Accounting The Basis For Business Decisions

Authors: Robert F. Meigs, Walter B Meigs

5th Edition

007041551X, 9780070415515

More Books

Students also viewed these Accounting questions

Question

Do you believe that Matilda overreacted to James? Why or why not?

Answered: 1 week ago