Question

Gary Stevens and Mary James are production managers in the Consumer Electronics Division of General Electronics Company, which has several dozen plants scattered in locations throughout the world. Mary manages the plant located in Des Moines, Iowa, while Gary manages the plant in El Segundo, California. Production managers are paid a salary and get an additional bonus equal to 10% of their base salary if the entire division meets or exceeds its target profits for the year. The bonus is determined in March after the company’s annual report has been prepared and issued to stockholders.

Shortly after the beginning of the new year, Mary received a phone call from Gary that went like this:

Gary:	How’s it going, Mary?
Mary:	Fine, Gary. How’s it going with you?
Gary:	Great! I just got the preliminary profit figures for the division for last year and we are within $65,200 of making the year’s target profits. All we have to do is pull a few strings, and we’ll be over the top!
Mary:	What do you mean?
Gary:	Well, one thing that would be easy to change is your estimate of the percentage completion of your ending work in process inventories.
Mary:	I don’t know if I can do that, Gary. Those percentage completion figures are supplied by Tom Winthrop, my lead supervisor, who I have always trusted to provide us with good estimates. Besides, I have already sent the percentage completion figures to corporate headquarters.
Gary:	You can always tell them there was a mistake. Think about it, Mary. All of us managers are doing as much as we can to pull this bonus out of the hat. You may not want the bonus check, but the rest of us sure could use it.

The final processing department in Mary’s production facility began the year with no work in process inventory. During the year, 350,000 units were transferred in from the prior processing department and 326,000 units were completed and sold. Costs transferred in from the prior department totaled $86,800,000. No materials are added in the final processing department. A total of $23,240,000 of conversion cost was incurred in the final processing department during the year.

Required:

1. Tom Winthrop estimated that the units in ending work in process inventory in the final processing department were 25% complete with respect to the conversion costs of the final processing department. If this estimate of the percentage completion is used, what would be the cost of goods sold for the year?

2. Does Gary Stevens want the estimated percentage completion to be increased or decreased?

3. What percentage completion would result in increasing reported net operating income by $65,200 over the net operating income that would be reported if the 25% figure were used?

Answer 1

1. The cost of good sold will be

Conversion cost on finished goods: 23240000*326000/332000 = 22820000

86800000*326000/350000 = 80848000

The total cost of goods sold is 103668000

2. Gary stevens want the percentage completion be increased has it will result in decrease in cost per unit thereby decreasing cost of goods sold.

3. The percentage completion that would result in profit by 65200 is if the value of work in progress is increases by 65200

X = 23240000*326000/(22820000-70800)

X= 23240000*326000/22754800

X = 332951

(332951-326000)= 6951 equivalent units

6951/24000*100 = 28.96% will result in increase in profit.