The board of directors of Mesa Verde Tool Company set the profit goal for calendar year 2016 at $2,200,000. It also established a bonus plan in which the top five officers of the company will share $150,000 if the profit goal is met or exceeded. If the goal is not met, there is no bonus. T. J. Elias, the chief financial officer and one of the top five executives, prepared the following budgeted income statement for 2016, based on the board’s profit directive: Mesa Verde Tool Company Budgeted Income Statement For the Year Ended December 31, 2016 Sales (500,000 units) $15,000,000 Cost of goods sold Beginning inventory $0 Cost of goods manufactured $8,000,000 Cost of goods available for sale $8,000,000 Ending inventory $0 $8,000,000 Gross margin $7,000,000 Selling and administrative expenses: Variable selling and administrative $2,800,000 Fixed selling and administrative $2,000,000 $4,800,000 Net operating income $2,200,000 *Variable manufacturing: 500,000 units x $5 per unit = $2,500,000; Fixed manufacturing: $5,500,000 By late September, it became apparent that sales were running below forecast and that annual sales would approximate 450,000 units, for an estimated net income of $1,230,000 and no bonus. In an executive committee strategy meeting, Bob Wrangell, vice president of Manufacturing, suggested that the production capacity was available to produce the entire 500,000 units or more, even if that sales level could not be reached. He remembered a presenter, from a seminar that he recently attended, describing how net income could be increased by producing more than can be sold. He urged Elias to determine how many extra units they would need to produce to achieve the profit goal and, thus, earn the bonus. Step 1 – Complete the following… If sales only reach 450,000 units for the year, how many additional units would have to be produced, given the current selling price and cost structure, to meet the budgeted profit of $2,200,000? Prepare an absorption costing income statement to prove your answer above. Step 2 – Referencing the information above, answer the following questions. Each answer should be a minimum of 250 words (for a total of at least 500 words). What ethical responsibility, if any, does Elias have in this situation? What is there about the bonus plan that potentially encourages unethical behavior?
The board of directors of Mesa Verde Tool Company set the profit goal for calendar year 2016 at $2,200,000. It also established a bonus plan in which the top five officers of the company will share $150,000 if the profit goal is met or exceeded. If the goal is not met, there is no bonus. T. J. Elias, the chief financial officer and one of the top five executives, prepared the following
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Mesa Verde Tool Company |
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Budgeted Income Statement |
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For the Year Ended December 31, 2016 |
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Sales (500,000 units) |
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$15,000,000 |
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Cost of goods sold |
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Beginning inventory |
$0 |
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Cost of goods manufactured |
$8,000,000 |
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Cost of goods available for sale |
$8,000,000 |
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Ending inventory |
$0 |
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$8,000,000 |
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Gross margin |
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$7,000,000 |
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Selling and administrative expenses: |
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Variable selling and administrative |
$2,800,000 |
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Fixed selling and administrative |
$2,000,000 |
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$4,800,000 |
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Net operating income |
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$2,200,000 |
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*Variable manufacturing: 500,000 units x $5 per unit = $2,500,000; Fixed manufacturing: $5,500,000 |
By late September, it became apparent that sales were running below
Step 1 – Complete the following…
- If sales only reach 450,000 units for the year, how many additional units would have to be produced, given the current selling price and cost structure, to meet the budgeted profit of $2,200,000?
- Prepare an absorption costing income statement to prove your answer above.
Step 2 – Referencing the information above, answer the following questions. Each answer should be a minimum of 250 words (for a total of at least 500 words).
- What ethical responsibility, if any, does Elias have in this situation?
- What is there about the bonus plan that potentially encourages unethical behavior?
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