Question

Carlos Cavalas, the manager of Echo Products’ Brazilian Division, is trying to set the production schedule for the last quarter of the year. The Brazilian Division had planned to sell 70,400 units during the year, but by September 30 only the following activity had been reported:

	Units
Inventory, January 1	0
Production	72,800
Sales	64,000
Inventory, September 30	8,800

The division can rent warehouse space to store up to 29,300 units. The minimum inventory level that the division should carry is 1,600 units. Mr. Cavalas is aware that production must be at least 5,280 units per quarter in order to retain a nucleus of key employees. Maximum production capacity is 45,800 units per quarter.

Demand has been soft, and the sales forecast for the last quarter is only 20,000 units. Due to the nature of the division’s operations, fixed manufacturing overhead is a major element of product cost.

Required:

1a. Assume that the division is using variable costing. How many units should be scheduled for production during the last quarter of the year?

1b. Will the number of units scheduled for production affect the division’s reported income or loss for the year?

2. Assume that the division is using absorption costing and that the divisional manager is given an annual bonus based on divisional operating income. If Mr. Cavalas wants to maximize his division’s operating income for the year, how many units should be scheduled for production during the last quarter?

Answer 1

Part-1(a): Statement showing Unit Scheduled for production
Particular	Amount
Sales - Last Quarter	20000
Minimum Inventory Level	5280
Total Requirement	25280
Beg Inventory	-8800
Unit Scheduled for Production	16480

1(b) No.

Part-2: Statement showing Unit Scheduled for production
Particular	Amount
Sales - Last Quarter	20000
Maximum Inventory Level	29300
Total Requirement	49300
Beg Inventory	-8800
Unit Scheduled for Production	40500