Management Perks Analysis
In a normal year, Wilson Industries has $24,000,000 of fixed manufacturing costs and produces 60,000 units. In the current year, the demand for its product has decreased, and it appears that the company will be able to sell only 50,000 units. Senior managers are concerned, because their bonuses are tied to reported profit. In light of this, they are considering keeping production at 60,000 units.
Answer the following questions:
1. Explain why keeping the production at a level beyond the quantity needed for current sales will increase profit?
2. Discuss the impact of producing 10,000 "extra" units?
3. Is the managers' proposed action in the best interest of shareholders?
Note: Consider relevant facts, such as decreased product demand, senior managers' bonuses, and proposed production.