Problem:
Jaclyn Rourke is the president and chief executive officer of Parker Company. Parker is a family-owned business that is one of the oldest watch producers in the United States. The last several years have been very difficult for Parker primarily because of the increasing price pressures brought to bear by foreign competition. At this point, Parker hopes to stay in business, but the company's 120-year history does not ensure current competitiveness. Jaclyn asked the company's accounting manager to accumulate certain operational and financial data from last year. These data are shown below:
Beginning inventory units 25,000
Units produced 90,000
Units sold 95,000
Direct material per unit $15.00
Direct labor per unit 5.00
Variable manufacturing overhead per unit 10.00
Fixed manufacturing overhead 100,000
Required:
Question 1:Jaclyn is going to the company's primary bank to negotiate a line of credit and wants to show the maximum amount of income without actually changing last year's results. What costing method of inventory (variable or absorption) should she choose? Why?
Question 2: If the bank requires GAAP financial statements, what method would Jaclyn choose?
Question 3: The bank sends her off with the comment, "We need more net income for a couple of months before e can grant you the line of credit." Because Jaclyn projects no increase in demand for the company's watches in the next few months, what options are available to her?
Question 4: Which option should she choose and why? Do you think the options are legal? Are they ethical?