Gary Stevens and Mary James are production managers in the Consumer Electronics
ID: 2601751 • Letter: G
Question
Gary Stevens and Mary James are production managers in the Consumer Electronics Division of General Electronics Company, which has several dozen plants scattered in locations throughout the world. Mary manages the plant located in Des Moines, Iowa, while Gary manages the plant in El Segundo, California. Production managers are paid a salary and get an additional bonus equal to 10% of their base salary if the entire division meets or exceeds its target profits for the year. The bonus is determined in March after the company’s annual report has been prepared and issued to stockholders.
Great! I just got the preliminary profit figures for the division for last year and we are within $70,200 of making the year’s target profits. All we have to do is pull a few strings, and we’ll be over the top!
I don’t know if I can do that, Gary. Those percentage completion figures are supplied by Tom Winthrop, my lead supervisor, who I have always trusted to provide us with good estimates. Besides, I have already sent the percentage completion figures to corporate headquarters.
You can always tell them there was a mistake. Think about it, Mary. All of us managers are doing as much as we can to pull this bonus out of the hat. You may not want the bonus check, but the rest of us sure could use it.
The final processing department in Mary’s production facility began the year with no work in process inventories. During the year, 290,000 units were transferred in from the prior processing department and 270,000 units were completed and sold. Costs transferred in from the prior department totaled $60,030,000. No materials are added in the final processing department. A total of $18,012,500 of conversion cost was incurred in the final processing department during the year.
Tom Winthrop estimated that the units in ending inventory in the final processing department were 25% complete with respect to the conversion costs of the final processing department. If this estimate of the percentage completion is used, what would be the Cost of Goods Sold for the year? (Round your cost per unit to 2 decimal places.)
What percentage completion would result in increasing reported net operating income by $70,200 over the net operating income that would be reported if the 25% figure were used? (Do not round your cost per unit calculations. Round your intermediate calculations to the nearest dollar amount and final answer to the nearest whole percent.)
Gary Stevens and Mary James are production managers in the Consumer Electronics Division of General Electronics Company, which has several dozen plants scattered in locations throughout the world. Mary manages the plant located in Des Moines, Iowa, while Gary manages the plant in El Segundo, California. Production managers are paid a salary and get an additional bonus equal to 10% of their base salary if the entire division meets or exceeds its target profits for the year. The bonus is determined in March after the company’s annual report has been prepared and issued to stockholders.
Explanation / Answer
1.
Opening Raw Material = 290000 units
Total transferred cost = $60,030,000
Cost per unit transferred =(60030000/290000) = $207
Units produced and sold= 270,000
25% of remaining units complete = (290000-270000)*25% = 5000
Total produced units = 270000+5000 = 275000 units
Total cost of conversion = $18,012,500
Per unit cost of conversion = 18012500/275000 = $65.5
COGS = 270000*(207+65.5)
= $73,575,000
2.
Gary wants the percentage completion to be increased as it will show inflated figures and achieved targets
3.
Cost per EUP
Cost of goods sold = cost per equivalent unit * units completed and sold
73575000 – 70200 = (207 + x) * 270000
73504800 = (207 + x) * 270000
319.02 = (207 + x)
x = 272.24-207
x = 65.24
EUP
EUP = Cost of conversion added during period / cost per EUP
EUP = 18012500 / 65.24
EUP = 276096
Percentage completion
EUP = Units completed and sold + (Ending WIP * Percentage completion)
276096 = 270000 + (15000*x)
276096 - 270000 = (15000*x)
X = 6096/15000 = 40.64%
Percentage completion of 40.64% would result in increasing reported net operating income by $70,200 over the net operating income that would be reported if the 25% figure were used.
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