QUESTION THREE (a) The shareholders of Teaing plc have recently appointed a new managing director, Mrs. Bianchini. The company produces and sells teapots to distribution groups and has been a leader in the market for 30 years. However, the appearance of new competitors has started eroding the company's monopoly and has brought a sharp reduction in sales. With the end of the financial year approaching, Mrs. Bianchini soon realises that the earnings growth that she predicted will not reach her expectations and this news will not be pleasing to the shareholders. After consulting the company's management accountant, Mr. Conti, Mrs. Bianchini decides to reclassify as product costs many of the costs that are currently classified as period costs. In addition, Mrs. Bianchini orders that wherever possible, expenditures should be postponed to the New Year including cancelling or postponing orders with suppliers, delaying planned maintenance and training, and cutting back on end-of-year advertising and travel. The company is expecting to have substantial stocks of work in progress and finished goods at the end of the year. Required: 1. Why has Mrs. Bianchini decided to re-classify period costs as product costs? (10 Marks) 2. Do you believe Mrs. Bianchini's actions are ethical? Justify your answer. (15 Marks) (b) Explain the following concepts: 1. Operating leverage, 2. Cost object, 3. Margin of safety. (15 Marks)