Q1EI
Question
Sampson Company operates a manufacturing facility where several products are made. Each product is considered a business segment, and the product managers have the opportunity to receive a bonus based on the profit of the segment. Franco Hopper is the manager for the scissors product line. Production and sales data for the scissors product line for the past three years are shown below:
Year 1 Year 2 Year 3 Units produced 100,000 units 125,000 units 160,000 units Units sold 100,000 units 100,000 units 100,000 units Sales price per unit \( 12.00 per unit \) 12.00 per unit $ 12.00 per unit Variable manufacturing cost per unit 5.00 per unit 5.00 per unit 5.00 per unit Total fixed manufacturing costs 200,000 per year 200,000 per year 200,000 per year
Hopper’s bonus is 0.5% of the gross profit of the scissors product line, based on absorption costing. Upper management is discussing changing the bonus system so that bonuses are based on operating income using variable costing. Hopper is opposed to this change and has been trying to convince the other product managers to join him in voicing their opposition. There are no beginning inventories in Year 1.
Requirements:
- Calculate the fixed cost per unit produced for each year.
- Prepare income statements for the three years using absorption costing.
- Calculate Hopper’s bonus based on the current plan.
- Prepare income statements for the three years using variable costing.
- Calculate Hopper’s bonus based on the proposed plan.
- Give possible reasons why Hopper is opposed to the proposed bonus plan. Do you think Hopper’s actions have been ethical the past three years? Why or why not?
Step-by-Step Solution
VerifiedRequirements | Year 1 | Year 2 | Year 3 |
Fixed cost per unit | $2 | $1.6 | $1.25 |
Operating income under absorption costing | $497,500 | $537,300 | $572,125 |
Hopper’s bonus for current plan | $2500 | $2700 | $2875 |
Operating income under variable costing | $500,000 | $500,000 | $500,000 |
Hopper’s bonus on the proposed plan | $2500 | $2500 | $2500 |
Absorption costing is a method used to determine a product's cost by considering all the direct costs and fixed and variable manufacturing overheads.
Particulars | Year 1 | Year 2 | Year 3 |
Fixed cost | $200,000 | $200,000 | $200,000 |
Units produced | 100,000 | 125,000 | 160,000 |
Fixed cost per unit | $2 | $1.6 | $1.25 |
Particulars | Year 1 | Year 2 | Year 2 |
Net sales revenue | $1,200,000 | $1,200,000 | $1,200,000 |
Less: Cost of goods sold | $700,000 | $660,000 | $625,000 |
Gross profit | $500,000 | $540,000 | $575,000 |
Variable selling and administrative cost (0.5% of gross profit) | $2,500 | $2,700 | $2,875 |
Operating Income | $497,500 | $537,300 | $572,125 |
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Working note:
Calculation of cost of goods sold:
years | Variable cost per unit (a) | Fixed cost per unit (b) | Cost of goods sold per unit (a+b)
| Cost of goods sold |
Year 1 | $5 | $2 | $7 | $7,00,000 |
Year 2 | $5 | $1.6 | $6.6 | $660,000 |
Year 3 | $5 | $1.25 | $6.25 | $625,000 |
Note: Taking variable selling and administrative cost 0.5% on gross profit because the company is giving a bonus to hopper’s 0.5%, and it is based on the gross profit earned on sales, so it is an expense of variable nature to the company.
Particulars | Year 1 | Year 2 | Year 2 |
Gross profit | $500,000 | $540,000 | $575,000 |
Variable selling and administrative cost (0.5% of gross profit) | $2,500 | $2,700 | $2,875 |
Particulars | Year 1 | Year 2 | Year 2 |
Net sales revenue | $1,200,000 | $1,200,000 | $1,200,000 |
Less: Variable manufacturing cost
| $500,000 | $500,000 | 500,000 |
Contribution | $700,000 | $700,000 | $700,000 |
Fixed cost | $200,000 | $200,000 | $200,000 |
Operating Income | $500,000 | $500,000 | $500,000 |
Particulars | Year 1 | Year 2 | Year 2 |
Operating Income | $500,000 | $500,000 | $500,000 |
Variable selling and administrative cost (0.5% of Operating income) | $2,500 | $2,500 | $2,500 |
Hopper is opposing the proposed plan because he will receive less amount of bonus under the proposed plan.