Problem:
Jerry Cooper was hired during January 2012 to manage the home products division of Advanced Techno. 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, Jerry 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. Jerry 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 Jerry came on board there was virtually no beginning inventory. The selling price and variable cost per unit remained the same from2011 to 2012. Additional information is provided below.
|
2011
|
2012
|
|
Net income
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$400,000
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$600,000
|
|
Units produced
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20,000
|
25,000
|
|
Units sold
|
20,000
|
20,000
|
|
Fixed manufacturing overhead costs
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$1,000,000
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$1,000,000
|
|
Fixed manufacturing overhead costs per unit
|
$50
|
$40
|
Instructions
(a) Calculate Jerry's bonus based upon the net income shown above.
(b) Recomputed the 2011 and 2012 results using variable costing.
(c) Recomputed Jerry's 2012 bonus under variable costing.
(d) Were Jerry's actions unethical? Do you think any actions need to be taken by the company?