Southern Press produces textbooks for high school accounting courses. The company recently hired a new editor, Ashley Green, to handle production and sales of books for an introduction to accounting course. Ashley's compensation depends on the gross margin associated with sales of this book. Ashley needs to decide how many copies of the book to produce. The following information is available for the fall semester 2017: (Click the icon to view the information.) Ashley has decided to produce either 16,000, 20,000, or 24,800 books. Read the requirements Requirement 1. Calculate expected gross margin if Ashley produces 16,000, 20,000, or 24,800 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 16,000 books, then 20,000 books, and lastly 24,800 books. (Enter a "0" for any zero balance accounts. If an account does not have a variance, do not select a label.) 16,000 books 1296000 20,000 books 1620000 24,800 books 2008800 Revenues More Info Cost of goods sold 1104000 1284000 1500000 0 96000 211200U Production-volume variance 1104000 1188000 1288800 Net cost of goods sold 192000 432000 720000 Gross margin Requirement 2. Calculate ending inventory in units and in dollars for each production level. (Complete all answer boxes. For amounts with a "0" unit or dollar balance, make sure to enter "0" in the Estimated sales 16,000 books Beginning inventory 0 books Average selling price $81 per book Variable production costs $45 per book Fixed production costs $384,000 per semester The fixed-cost allocation rate is based on expected sales and is therefore equal to $384,000/16,000 books = $24 per book. 16,000 books 24,800 books 20,000 books 0 books 0 books Beginning inventory Production 0 books 1104000 Sales books books books Print Done Ending inventory Cost per book Cost of ending inventory Requirement 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 10% of the cost of the ending inventory as an expense for evaluating the manager. (Complete all answer boxes. For a $0 change, make sure to enter "0" in the appropriate cell.) 16,000 books 20,000 books 24,800 books Gross margin Ending inventory charge Adjusted gross margin Do you think the metric would accomplish the objective of discouraging managers from producing products in excess of demand? V mitigate the increase in inventory associated with excess production. Therefore, it may be to mechanically compensate for all of the increased income. In addition, it from the Adjusting for ending inventory organization's standpoint. b. Include nonfinancial measures when evaluating management and rewarding performance. One nonfinancial measure is to compute the excess production ratio. Determine the formula, then compute the ratio at each production level. (Round the ratios to two decimal places.) # of books Excess production ratio 16,000 / 20,000 = 24,800 = A ratio of ending inventory to beginning inventory is The non-financial measures
