Gary Stevens and Mary James are production managers in the Consumer Electronics
ID: 2602524 • 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 $47,700 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, 300,000 units were transferred in from the prior processing department and 265,000 units were completed and sold. Costs transferred in from the prior department totaled $80,100,000. No materials are added in the final processing department. A total of $19,710,000 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 $47,700 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.
Computation of the Cost of Goods Sold:
Transferred In
Conversion
Units completed and sold....................
265,000
265,000
Ending work in process:
Transferred in:
35,000 units × 100% complete........
35,000
Conversion:
35,000 units × 25% complete..........
8750
Equivalent units of production.............
300,000
273750
(300000-265000) = 35000
Transferred In
Conversion
Cost of beginning work in process........
$ 0
$ 0
Cost added during the period..............
80100000
19710000
Total cost (a).....................................
$80100000
$19710000
Equivalent units of production (b)........
300000
273750
Cost per equivalent unit, (a) ÷ (b)........
$267.00
$72
Cost of goods sold = 265,000 units × ($267 per unit + $72 per unit) = $89835000
2. Increase (because the higher the percentage of completion of ending work in process, the higher the equivalent units for the period and the lower the unit costs.)
3. Cost of goods sold will decrease to (89835000-47700) = 89787300
Unit cost = $267 + 19710000/(265000+35000X)
And the cost of goods sold can be computed as follows:
Cost of goods sold = 265,000 × Unit cost
Because the cost of goods sold must be reduced down to $57,800,000, the unit cost must be $338.82 ($89787300 ÷ 265,000 units). Thus, the required percentage completion, X, to obtain the $200,000 reduction in cost of goods sold can be found by solving the following equation:
$267 + 19710000/(265000+35000X) = 338.82
19710000/(265000+35000X) = 338.82-267
19710000/(265000+35000X) = 71.82
265000+35000X = 19710000/71.82
265000+35000X = 274436.09
35000X =274436.09-265000
X=(274436.09-265000)/35000
X= 27%
1.
Computation of the Cost of Goods Sold:
Transferred In
Conversion
Units completed and sold....................
265,000
265,000
Ending work in process:
Transferred in:
35,000 units × 100% complete........
35,000
Conversion:
35,000 units × 25% complete..........
8750
Equivalent units of production.............
300,000
273750
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