Question 2: (12 points) EgoTech Company is a traditional manufacturing company in Hong Kong. The company manufactures and sells a special electronic component that is crucial to many electronic devices. EgoTech had been using an absorption costing system. The plant has a maximum production capacity of 40 million units but produced and sold only 10 million units in Year 1. There was no beginning or ending inventory. EgoTech Company's income statement for Year 1 is as follows: EgoTech Company Income Statement For the Year Ended December 31, Year 1 (in HK$'000) Sales (Note 1) S 60,000 Less: Cost of Goods Sold Direct Costs (Note 2) 20,000 Manufacturing Overhead 48.000 68.000 Gross Margin S (8,000) Less: Selling, General and Admin Expenses 10.000 Operating Loss $ (18,000) Notes: 1. 10 million units at $6 per unit. 2. 10 million units at $2 per unit The board of directors was concerned about the $18 million loss. A consultant approached the board with the following offer: "I agree to become CEO for no fixed salary. But I insist on a year-end bonus of 10% of operating profit (before considering the bonus)." The board of directors agreed to these terms and the consultant was hired as EgoTech's new CEO on January 1, Year 2. The new CEO promptly stepped up production to an annual amount of 30 million units. Sales for Year 2 remained at 10 million units. The resulting EgoTech Company income statement for Year 2 is as follows: EgoTech Company Income Statement For the Year Ended December 31, Year 2 (in HKS'000) Sales (Note 1) S 60.000 Less: Cost of Goods Sold Cost of Goods Manufactured: Direct Costs (Note 2) S 60,000 Manufacturing Overhead 48.000 S 108.000 Less: Ending Inventory Direct Costs (Note 3) S 40.000 Manufacturing Overhead (Note 4) 32,000 72,000 36,000 Gross Margin S 24,000 Less: Selling, General, and Admin Expenses 10,000 Operating Profit (before bonus) S 14.000 Notes: 1. 10 million units at $6 per unit. 2. 30 million units at $2 per unit. 3. 20 million units at $2 per unit. 4. 20/30 x $48 million. The day after the income statement was verified by the auditors, the CEO took his cheque for $1,400,000 and resigned to take a job with another corporation. He remarked, "I enjoy challenges. Now that EgoTech Company is in the black, I would prefer tackling another challenging situation." His contract with his new employer is similar to the one he had with the EgoTech Company- Required: Discuss why the new CEO decides to leave EgoTech at the end of Year 2. Show all supporting computations. Limit your answer to 300 words
