Brett Spelling was hired during January 2014 to manage the home products division of Hi-Tech Products. As part of his employment contract, he was told that he 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, Brett met with his plant managers and explained that he 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. Brett stated that under previous management the company had missed out on too many sales opportunities because it didn’t have enough inventory on hand. Because previous management had employed just-in-time inventory practices, when Brett came on board there was virtually no beginning inventory. The selling price and variable costs per unit remained the same from 2013 to 2014. Additional information is provided below.
2013 2014
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
a) Calculate Brett’s bonus based upon the net income shown above. (b) Recompute the 2013 and 2014 results using variable costing. (c) Recompute Brett’s 2014 bonus under variable costing.