required Info: Estimated sales 23,000 books Beginning inventory 0 books Average
ID: 2569173 • Letter: R
Question
required Info:
Estimated sales
23,000
books
Beginning inventory
0
books
Average selling price
$77
per book
Variable production costs
$49
per book
Fixed production costs
$552,000
per semester
The fixed-cost allocation rate is based on expected sales and is therefore equal to
$552,000/23 23,000 books + $24 per book
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 15% 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.)
23,000 books
34,500 books
36,800 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?
Adjusting for ending inventory (does not/ does to some degree/will always) mitigate the increase in inventory associated with excess production. Therefore, it may be (difficult/easy) to mechanically compensate for all of the increased income. In addition, it does nothing to hold the manager responsible for the poor decisions rewards the manager for increasing production which is a good decision from the 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
23,000
/
=
34,500
/
=
36,800
/
=
Estimated sales
23,000
books
Beginning inventory
0
books
Average selling price
$77
per book
Variable production costs
$49
per book
Fixed production costs
$552,000
per semester
21,020 books 14,500 books 36300 books uid groes marg DD you think te melri woukd accamclch Ihe objete of dlcouraging managerz fram prod cnp prad cts Inces af demana? adi ain | from tha ùrnanbati standpoint -Excess praducion ralia 23 000 | The non-!nancial measures Chaose trom any llat ar ener any number in the Input ialds and then condnue to the next questionExplanation / Answer
a. No.of books produced 23000 34500 36800 Sales value at 77/book 1771000 2656500 2833600 Less: Variable prodn. Costs at 49/book 1127000 1690500 1803200 Less: Fixed prodn. Costs at 24 /book 552000 828000 883200 Gross Margin 92000 138000 147200 Ending inventory(prodn.-Sales) 0 11500 13800 Value at (49+24= $ 73)/book 0 839500 1007400 Less: 15% charge on Ending Inventory 0 125925 151110 Adjusted Gross Margin 92000 12075 -3910 Adjusting for ending inventory does to some degree mitigate the increase in inventory associated with excess production. Therefore, it may be difficult to mechanically compensate for all of the increased income. In addition, it does nothing to reward the manager for increasing production which is a good decision from the organization's standpoint. b. Production Level Excess Ending Inventory Total production Excess production ratio 23,000 0 23000 0 34,500 11500 34500 33.33% 36,800 13800 36800 37.50%
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