CASE ANALYSIS #4:

VARIABLE COSTING

ABSORPTION

AND

Problem:
Scott Bestor was hired during January 2005 to manage the home products
division of Advanced Techno. As part of his employment contract, he was told
that he would get 5,000 of additional bonus for every 1% increase that the
divisions profits exceeded those of the previous year.
Soon after coming on board, Scott met with his plant managers and
explained that he wanted the plants to be run at full capacity. Previously the
plant had employed just-in-time inventory practices and had consequently
produced units only as they were needed. Scott stated that under previous
management the company had missed out on too many sales opportunities
because it didnt have enough inventory practices, when Scot came on board
there was virtually no beginning inventory. The selling price and variable cost
per unit remained the same from 2004 to 2005. Additional information is
provided below.

Net Income
Units Produced
Units Sold
Fixed Manufacturing
Overhead Costs
Fixed Manufacturing
Overhead Costs per unit

2004
400,000
20,000
20,000

2005
600,000
25,000
20,000

1,000,000

1,000,000

50

40

Instructions:
1.
2.
3.
4.

Calculate Scotts bonus based upon the net income shown above.
Recomputed the 2004 and 2005 results using variable costing.
Recomputed Scotts 2005 bonus under variable costing
Were Scotts actions unethical? Do you think any actions need to be
taken by the company?

Answers:
1.

200,000
400.000

50% increase

5,000 x 50 = 250,000
2. Given that selling price and variable cost per unit is the same for the 2
periods (2004-2005).
Assume:
Variable Cost/unit = 60
Selling price/unit = 130

Sales
Variable Costs
Gross Profit
Fixed Costs
Net Income

2004
2,600,000
(1,200,000)
1,400,000
(1,000,000)
400,000

2005
2,600,000
(1,200,000)
1,400,000
(1,000,000)
400,000

3. 0 or No Bonus, since the there was no increase in the net income for
2015.
4. No, because the action done by Scott is part of his duty being the product
manager of the company. So, it is his duty to make sure that the company is
making profits not just simply making but maximize profits. The suggestion
by Scott to company should be considered by the management since Scotts
aim was to maximize the profits of the company. Also, in the approval of the
suggestion, Scott must see to it that there is a feasible and material increase
in profits in order for the management to pursue with the suggestion of Scott
which is to run the plants at full capacity in order to produce and sell more
units.

Submitted By:

Go, Joebert A.
Lacpao, Reggiel Miel S.
Espiritu, Jansce Diovell C.
Laraga, Janice L.
Antoni, Lani G.
Badidles, Adair A.
MANACO 1 (4:00-5:00/5:30) M-F