Gary Stevens and Mary James are production managers in the Consumer Electronics
ID: 2601808 • 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 $76,080 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, 340,000 units were transferred in from the prior processing department and 317,000 units were completed and sold. Costs transferred in from the prior department totaled $64,600,000. No materials are added in the final processing department. A total of $20,752,825 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.)
Cost of good sold ??
What percentage completion would result in increasing reported net operating income by $76,080 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.)
Percentage completion ???
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
Cost of Goods Available for Sale = Beginning Finished Goods Inventory + Cost of Goods Manufactured.
Cost of Goods Sold = Cost of Goods Available for Sale - Ending Finished Goods Inventory.
Gross Profit = Sales - Cost of Goods Sold
The above relationships very clearly indicate that a higher gross profit can be achieved only with a lower cost of goods sold, and a lower cost of goods sold can be attained with a higher ending finished goods inventory.
1. Cost of Goods Sold : $ 80,613,100.
Costs per unit upto the prior processing department = $ 64,600,000 / 340,000 units = $ 190 per unit.
Equivalent unit in the final processing department = ( 340,000 - 317,000) x 25% + 317,000 x 100% = 322,750 units
Conversion cost per equivalent unit in the final processing department = $ 20,752,825 / 322,750 units = $ 64.30.
Cost of Goods Sold = 317,000 x $ ( 190 + 64.30) = $ 80,613,100
2. Gary Stevens wants the estimated percentage completion to be increased.
3. Percentage Completion : 30 %.
Required Cost of Goods Sold = $ 80,613,100 - $ 76,080 = 80,537,020
Cost per unit sold = $ 80,537,020 / 317,000 units = $ 254.06
Cost per unit in the final processing department = $ 254.06 - $ 190 = $ 64.06
Number of equivalent units required = $ 20,752,825 / $ 64.06 = 323,959.18.
Number of equivalent units for ending inventory = 323,959.18 - 317,000 = 6,959.18
Percentage of completion for ending inventory = 6,959.18 / 23,000 * 100 = 30.26 %
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