Safa Khalid was hired during January 2014 to manage the home products division of Saco Products. As part of her employment contract, she was told that she would get $5,000 of additional bonus for every 1% increase that the divisions profits exceeded those of the previous year.

Soon after coming on board, Safa met with her plant managers and explained that she wanted the plants to be run at full capacity. Previously, the plant had employed just-in-time inventory practices and had consequently produced units only as they were needed. Safa stated that under previous management the company had missed out on too many sales opportunities because it didnt have enough inventories on hand. Because previous management had employed just-in-time inventory practices, when Safa came on board there was virtually no beginning inventory. The selling price and variable costs per unit remained the same from 2013 to 2014. Additional information is provided below.

2013 2014

Net income $ 300,000 $ 525,000

Units produced 25,000 30,000

Units sold 25,000 25,000

Fixed manufacturing overhead costs $1,350,000 $1,350,000

Fixed manufacturing overhead costs per unit $ 54 $ 45

Required:

• Calculate Safas bonus based upon the net income shown above.
• Re-compute the 2013 and 2014 results using variable costing,
• Re-compute Safas bonus under variable costing.
• Was Safas action unethical? Do you think any actions need to be taken by the company?