Question

Wendy Jackson , the new plant manager of Binary Manufacturing has just reviewed a draft of his year - end statements . Wendy receives a year - end bonus of 10 % of the plant operating income before tax . The year - end income statement provided by the plant controller was disappointing to say the least . After reviewing the numbers , Wendy demanded that his controller go back and work the numbers ’ ’ again . Wendy insisted that if he did not see a better operating income the next time he would be forced to look for a new controller . Binary Manufacturing classifies all costs directly related to the manufacturing of its product as product costs . These costs are inventoried and later expensed as costs of goods sold when the product is sold . All other expenses , including finished goods warehousing costs of $ 3250000 are classified as period expenses . Wendy had suggested that warehousing costs be included as product costs because they are definitely related to our product The company produced 200 , 000 units during the period and sold 180 , 000 units . As the controller reworked the numbers he discovered that if he included Warehousing costs as product costs , he could improve operating income by $ 325 , 000 . He was also sure that these new numbers would make Wendy happy . Required : 1 . Show numerically how operating income would improve by $ 325 , 000 just by classifying the preceding costs as product costs instead of period expense ? 2 . Is Wendy correct in his justification that these costs are definitely related to our product ’ ’ , 3 . What should the plant controller do ?

Answer 1

Answer is given below