Effects of differing production levels on absorption costing income: Metrics to minimize inventory buildups.Mountain Press produces textbooks for high school accounting courses. The company recently hired a new editor, Jan Green, to handle production and sales of books for an introductory accounting course. Jan’s compensation depends on the gross margin associated with sales of this book. Jan needs to decide how many copies of the books to produce. The following information is available for the fall semester of 2017: Estimated sales50,000 booksO books160 per bookBeginning inventoryAverage selling priceVariable production costsFixed production costsThe fixed-cost allocation rate is based on expected sales and istherefore equal to S750,000/50,000 books = $15 per book.100 per book$750,000 per semesterJan has decided to produce either 50,000, 65,000, or 70,000 books.1. Calculate expected gross margin if Jan produces 50,000, 65,000, or 70,000 books. (Make sure you in-clude the production-volume variance as part of cost of goods sold.)2. Calculate ending inventory in units and in dollars for each production level.Required 3. Managers who are paid a bonus that is a function of gross margin may be inspired to produce a product inexcess of demand to maximize their own bonus. The chapter suggested metrics to discourage managersfrom producing products in excess of demand. Do you think the following metrics will accomplish this objec-tive? Show your work.a. Incorporate a charge of 10% of the cost of the ending inventory as an expense for evaluating themanager.b. Include nonfinancial measures (such as the ones recommended on page 341) when evaluatingmanagement and rewarding performance.

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Cornerstones of Cost Management (Cornerstones Series)

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Author:Don R. Hansen, Maryanne M. Mowen

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Chapter8: Budgeting For Planning And Control

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Problem 31E: Trumbull Co. plans to produce 100,000 toy cars during September. Planned production for October is...

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Effects of differing production levels on absorption costing income: Metrics to minimize inventory buildups.Mountain Press produces textbooks for high school accounting courses. The company recently hired a new editor, Jan Green, to handle production and sales of books for an introductory accounting course. Jan’s compensation depends on the gross margin associated with sales of this book. Jan needs to decide how many copies of the books to produce. The following information is available for the fall semester of 2017:

Estimated sales
50,000 books
O books
160 per book
Beginning inventory
Average selling price
Variable production costs
Fixed production costs
The fixed-cost allocation rate is based on expected sales and is
therefore equal to S750,000/50,000 books = $15 per book.
100 per book
$750,000 per semester
Jan has decided to produce either 50,000, 65,000, or 70,000 books.
1. Calculate expected gross margin if Jan produces 50,000, 65,000, or 70,000 books. (Make sure you in-
clude the production-volume variance as part of cost of goods sold.)
2. Calculate ending inventory in units and in dollars for each production level.
Required

3. Managers who are paid a bonus that is a function of gross margin may be inspired to produce a product in
excess of demand to maximize their own bonus. The chapter suggested metrics to discourage managers
from producing products in excess of demand. Do you think the following metrics will accomplish this objec-
tive? Show your work.
a. Incorporate a charge of 10% of the cost of the ending inventory as an expense for evaluating the
manager.
b. Include nonfinancial measures (such as the ones recommended on page 341) when evaluating
management and rewarding performance.

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