Malak Alansari was hired during January 2017 to manage the home products divisio
ID: 2577561 • Letter: M
Question
Malak Alansari was hired during January 2017 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 division’s profits exceeded those of the previous year.
Soon after coming on board, Malak 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. Malak stated that under previous management the company had missed out on too many sales opportunities because it didn’t have enough inventories on hand. Because previous management had employed just-in-time inventory practices, when Malak came on board there was virtually no beginning inventory. The selling price and variable costs per unit remained the same from 2016 to 2017. Additional information is provided below.
2016 2017
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 Malak’s bonus based upon the net income shown above.
-Re-compute the 2016 and 2017 results using variable costing,
-Re-compute Malak’s bonus under variable costing.
-Was Malak’s action unethical? Do you think any actions needed to be taken by the company?
Explanation / Answer
a) Increased in net income = ($525,000 - $300,000)/$300,000 75.00% For 1% increase in Net Income Malak's will get $5000 For 75% increase Malak will get $5000 x 75 $375,000 b) In Year 2016, units produced and units sold both were equal in such case both variable costing and absorption costing will provide the same net income so In year 2016 Net Income = $300,000 In Year 2017, units produced exceeded units sold by 5,000 units , net income under variable costing is not impacted by the number of units produced. The number of units sold,the selling price, variable cost per unit and total fixed costs didn’t change from year 2016 to 2017 so Net Income under Variable Costing = $300,000 c) There is no increase in net income from year 2016 to 2017 so there will be No bonus for Malak. d) Based on the information provided it is difficult to determine Malak's Motives.If Malak intentionally overproduced inventory in order to increase her bonus, then her actions were unethical. She believed following just-in-time inventory practices company had lost too many sales opportunities because it didn’t have enough inventories on hand. The company should begin preparing variable costing income statements and absorption costing statements so that they can find out Malak's motives for overproduction as variable costing is not impacted by the number of units produced and it will help in providing useful information for decision making.
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