Press produces textbooks for college courses. The company recently hired a new editor,

Casie White, to handle production and sales of books for an introduction to accounting course.

Casie's compensation depends on the gross margin associated with sales of this book.

Casie needs to decide how many copies of the book to produce. The following information is available for the fall semester 2013:

Estimated sales	17,000	books
Beginning inventory	0	books
Average selling price	$84	per book
Variable production costs	$46	per book
Fixed production costs	$425,000	per semester

The fixed cost allocation rate is based on expected sales and is therefore equal to

$ 425, 000/17,000books = $ 25per book.

Requirements 1 3

1. Calculate expected gross margin if Casie produces

17,000, 18,700, or 27,200 books. (Make sure you include the production-volume variance as part of cost of goods sold.)

Calculate the gross margin for each level of production. Begin with

17, 000 books, then

18,700 books, and lastly

27,200 books.

2.

Calculate ending inventory in units and in dollars for each production level.

3. Managers who are paid a bonus that is a function of gross margin may be inspired to produce a product in excess of demand to maximize their own bonus. There are metrics to discourage managers from producing products in excess of demand. Do you think the following metrics will accomplish this objective? Show your work.

a.	Incorporate a charge of 15 % of the cost of the ending inventory as an expense for evaluating the manager

b.	Include nonfinancial measures when evaluating management and rewarding performance.