Scott Bestor was hired during January 2011 to manage the home products division of Advanced Techno. As part of his employment, 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, Scott met with his plant managers and explained that he wanted the plant 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. Scott stated that under previous management the company had missed out on too many sales opportunities because it didnt have enough inventory on hand. Because previous management had employed just-in-time inventory practices, when Scott came on board there was virtually no beginning inventory. The selling price and variable cost per unit remained the same from 2010 to 2011. Additional information is provided below.2010 2011
Net income $400,000 $600,000
Units produced 20,000 25,000
Units sold 20,000 20,000
Fixed manufacturing overhead costs $1,000,000 $1,000,000
Fixed manufacturing overhead costs per unit $ 50 $ 40
Insructions
A) Calculate Scott's bonus based upon the net income shown above.
B) Recompute the 2010 and 2011 results using variable costing.
C) Recompute Scott's 2011 bonus under variable costing.
D) Were Scott's actions unethical? Do you think any actions need to be taken by the company?