Question

EXERCISE 3-1.   Equivalent Units.    Techno Enterprises is a manufacturer of microchips (referred to as chips). Its production process is complex and involves more than 100 steps, start- ing with production of small, round silicon wafers and ending with chips being put into individ- ual packages that protect them and provide connections to the products for which the chips are developed. The company uses a process costing system and has always made the simplifying assumption that wafers in production, but not yet finished, are 50 percent complete with respect to conversion costs.In the current year, the company has struggled due to a decline in computer sales and reduced demand for chips. To boost profit, the company has decided to start a very large number of wafers into production in the last few days of the year. Due to the use of ceramic carriers and other high-performance features, the Techno Enterprises production process typically takes 30 days.

Required
Explain why starting a large number of wafers into production will boost profit even though the chips that ultimately result from the wafers are ones that have not been sold or even completed. Is the company’s approach to boosting profit ethical?"

Answer 1

WHEN COMPANY MADE CHIPS WITH OLD PROCESS, IT TAKES 100 DAYS TO PRODUCTION OF CHIPS.

NOW COMPANY HAS CHANGES THE PRODUCTION OF CHIPS WHICH STARTS WITH LARGE NO. OF WAFERS INTO THE PRODUCTION. IT WILL TAKE 30 DAYS OF PRODUCTION.

THE PROFIT OF COMPANY IS INCREASE BECAUSE CONVERSION COST OF CONVERTING WEERS INTO CHIPS IS REDUCE AND FIXED COST IS ALSO REDUCED i.e. 100 DAYS TO 30 DAYS.

THEREFORE, COST OF MAKING CHIPS IS REDUCED AND SALE PRICE AS USALS. SO COMPANY EARNS MORE PROFIT RATHER THAN BEFORE.