GRB Ltd has several product lines with a manager in charge of each product line. The managers are paid a bonus based on the net income generated by their product line. Rubica (the CEO of GRB Ltd) was going through the financial reports of the 2nd quarter of 2021 to analyse the performance of the product lines. For 'Sweets' one of the largest product lines of GRB Ltd, Rubica noted that while the sales declined from $800,000 in quarter 1 to $600,000 in quarter 2, the product line manager of Sweets received a bonus larger than the 1st quarter. The manager of Sweets division was eligible for a higher bonus due to an operating profit increase from $90,000 in the 1st quarter to $120,000 in the 2nd quarter. Rubica wondered how the product line manager was entitled to a higher bonus with a decline in sales. Rubica also wants to know how net income increased with a decline in sales. Rubica found the following data from the financial reports of 'Sweets': Particulars Quarter 2 Quarter 1 Units sold (at $20 selling price) Variable production cost per unit Fixed production costs Fixed selling and administration expenses Budgeted production (units) Actual production Opening stock of finished goods 30,000 $8 $200,000 $140,000 40,000 50,000 0. 40,000 $8 $200,000 $140,000 40,000 30,000 10,000 GRB Ltd maintained a policy that any production volume variance would be written off to the cost of goods sold in the quarter in which it occurs. Required: (a) As a cost analysis expert, you are required to prepare the income statements for the first and second quarters of 2021, based on which the product line manager of 'Sweets' was entitled to a higher bonus with the decline in sales. Provide an explanation with supporting calculations as to why the net income increased with a decline in sales. (b) Suggest an alternative method of calculating operating profit wherein the operating profit will not increase with a decrease in sales. Prepare the income statements for the first and second quarters of 2021 based on the alternative you propose.
GRB Ltd has several product lines with a manager in charge of each product line. The managers are paid a bonus based on the net income generated by their product line. Rubica (the CEO of GRB Ltd) was going through the financial reports of the 2nd quarter of 2021 to analyse the performance of the product lines. For 'Sweets' one of the largest product lines of GRB Ltd, Rubica noted that while the sales declined from $800,000 in quarter 1 to $600,000 in quarter 2, the product line manager of Sweets received a bonus larger than the 1st quarter. The manager of Sweets division was eligible for a higher bonus due to an operating profit increase from $90,000 in the 1st quarter to $120,000 in the 2nd quarter. Rubica wondered how the product line manager was entitled to a higher bonus with a decline in sales. Rubica also wants to know how net income increased with a decline in sales. Rubica found the following data from the financial reports of 'Sweets': Particulars Quarter 2 Quarter 1 Units sold (at $20 selling price) Variable production cost per unit Fixed production costs Fixed selling and administration expenses Budgeted production (units) Actual production Opening stock of finished goods 30,000 $8 $200,000 $140,000 40,000 50,000 0. 40,000 $8 $200,000 $140,000 40,000 30,000 10,000 GRB Ltd maintained a policy that any production volume variance would be written off to the cost of goods sold in the quarter in which it occurs. Required: (a) As a cost analysis expert, you are required to prepare the income statements for the first and second quarters of 2021, based on which the product line manager of 'Sweets' was entitled to a higher bonus with the decline in sales. Provide an explanation with supporting calculations as to why the net income increased with a decline in sales. (b) Suggest an alternative method of calculating operating profit wherein the operating profit will not increase with a decrease in sales. Prepare the income statements for the first and second quarters of 2021 based on the alternative you propose.
Chapter3: Cost-volume-profit Analysis
Section: Chapter Questions
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Transcribed Image Text:GRB Ltd has several product lines with a manager in charge of each product line. The
managers are paid a bonus based on the net income generated by their product line. Rubica
(the CEO of GRB Ltd) was going through the financial reports of the 2nd quarter of 2021 to
analyse the performance of the product lines. For 'Sweets' one of the largest product lines of
GRB Ltd, Rubica noted that while the sales declined from $800,000 in quarter 1 to $600,000
in quarter 2, the product line manager of Sweets received a bonus larger than the 1st quarter.
The manager of Sweets division was eligible for a higher bonus due to an operating profit
increase from $90,000 in the 1st quarter to $120,000 in the 2nd quarter. Rubica wondered how
the product line manager was entitled to a higher bonus with a decline in sales. Rubica also
wants to know how net income increased with a decline in sales.
Rubica found the following data from the financial reports of 'Sweets':
Particulars
Quarter 2
Quarter 1
Units sold (at $20 selling price)
Variable production cost per unit
Fixed production costs
Fixed selling and administration expenses
Budgeted production (units)
Actual production
Opening stock of finished goods
30,000
$8
$200,000
$140,000
40,000
50,000
40,000
$8
$200,000
$140,000
40,000
30,000
10,000
GRB Ltd maintained a policy that any production volume variance would be written off to the
cost of goods sold in the quarter in which it occurs.
Required:
(a) As a cost analysis expert, you are required to prepare the income statements for the
first and second quarters of 2021, based on which the product line manager of 'Sweets'
was entitled to a higher bonus with the decline in sales. Provide an explanation with
supporting calculations as to why the net income increased with a decline in sales.
(b) Suggest an alternative method of calculating operating profit wherein the operating
profit will not increase with a decrease in sales. Prepare the income statements for the
first and second quarters of 2021 based on the alternative you propose.
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