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ETHICS CHALLENGE LO$7-2$ g

Brazilian Division had planned to sell $3,600$ units during the year, but by September $30$ only the following activity had been reported:

Units

Inventory, January $1$

Production

Sales

Inventory, September $30$

$2,400$

$2,000$

$400$

The division can rent warehouse space to store up to $1,000$ units. The minimum inventory level that the division should carry is $50$ units. Mr$.$ Cavalas is aware that production must be at least $200$ units per quarter in order to retain a nucleus of key employees. Maximum production capacity is $1,500$ units per quarter.

Demand has been soft, and the sales forecast for the last quarter is only $600$ units. Due to the nature of the division's operations, fixed manufacturing overhead is a major element of product cost.

Required:

$$Assume that the division is using variable costing. How many units should be scheduled for production during the last quarter of the year? $($The basic formula

for computing the required production for the quarter is: Required production $=$ Expected sales $+$ Desired ending inventory $-$ Beginning inventory.$)$ Show

computations and explain your answer. Will the number of units scheduled for production affect the division's reported income or loss for the year? Explain.

$$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? $[$See the

formula in $(1)$ above.$]$ Explain.

$$Identify the ethical issues involved in the decision Mr$.$ Cavalas must make about the level of production for the last quarter of the year.

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