Question

Mountain Press produces textbooks for high school accounting courses. The company recently hired a new editor, Jan Green, to handle production and sales of books for an introduction to accounting course compensation depends on the gross margin associated with sales of this book. Jan needs to decide how many copies of the book to produce. The following information is available for the fall semester 201 i (Click the icon to view the information. Jan has decided to produce either 50.000, 65.000, or 70.000 books. Read the requirements Requirement 1. Calculate expected gross margin if Jan produces 50,000, 65,000, or 70,000 books. (Make sure you include the production-volume variance as part of cost of goods sold.) Calculate eg ach level of production. Begin with 50,000 books, then 65,000 books, and lastly 70,000 books. (Enter "0" for any zero balance accounts. If an account does not have a let a label. variance, 50,000 books Revenues Cost of goods sold Production-volume variance 9-36 (book/static) Mountain Press produces textbooks for high school accounting courses. The company recently hired a new editor, Jan Green, to handle production and sales of books for an introductio Jan's compensation depends on the gross margin associated with sales of this book. Jan needs to decide how many copies of the book to produce. The following information is availabl 2017: (Click the lcon to view the informatio - X iRequirements Jan has decided to produce either 50,00 Read the requirements Calculate the gross margin for each leve variance, do not select a label.) If an account 1 Calculate expected gross margin if Jan produces 50,000, 65,000, or 70,000 books. (Make sure you include the production-volume variance as part of cost of goods sold.) 2. Calculate ending inventory in units and in dollars for each production level. 50,00 3. Managers who are paid a bonus that is a function of gross margin may be inspired to produce a product in excess of demand to maximize their own bonus. There are metrics to discourage managers from producing products in excess of demand. Do you think the following metrics will accomplish this objective? Show your work. Incorporate a charge of 10% of the cost of the ending inventory as an expense for evaluating the manager. Include nonfinancial measures when evaluating management and rewarding performance Revenues Cost of goods sold a Production-volume variance b Net cost of goods sold Gross margin Print Done i e i (Click the icon to view the information.) Jan has decided to produce either 50,000, 65,000, or 70 000 hooks Read the requirements Calculate the gross margin for each level of production variance, do not select a label.) - X i More Info 50,000 books Estimated sales 50,000 books Revenues Beginning inventory 0 books Cost of goods sold Average selling price 160 per book Production-volume variance Variable production costs 100 per book Net cost of goods sold $ 750,000 per semester Fixed production costs Gross margin The fixed-cost allocation rate is based on expected sales and is therefore equal to $750,000/50,000 books $15 per book. hoose from any list or enter any number in the inp Print Done parts aininc

Answer 1

	50,000 books	65,000 books	70,000 books
Gross margin (Requirement 1)	2250000	2475000	2550000
Ending inventory charge (Requirement 2)	0	1725000	2300000
Adjusted gross margin (Requirement 3)	2250000	2302500	2320000
Adjusting for ending inventory Does to some degree  mitigate the increase in inventory associated with excess production.​ Therefore, it may be Difficult  to mechanically compensate for all of the increased income. In​ addition, it does nothing to hold the manager responsible for the poor decisions from the organization's standpoint.
Requirement 1
	50,000 books	65,000 books	70,000 books
Revenues (50000 x  $160 per book)	$8,000,000	$8,000,000	$8,000,000
Cost of goods sold (50,000 x ($100 + $15)	$5,750,000	$5,750,000	$5,750,000
Production - volume variance (U/F?)	0	-225000	-300000
	N	F	F
Net Cost of Goods Sold	5750000	5525000	5450000
Gross Margin	2250000	2475000	2550000
Production Volume variance =   Budgeted fixed cost – fixed overhead rate × production
Production Volume variance  (50000) =   $750000 - ($15 x 50,000)	0	N
Production Volume variance  (65000) =   $750000 - ($15x 65,000)	-225000	F
Production Volume variance  (70000) =   $750000 - ($15 x 70,000)	-300000	F
Requirement 2: Calculate ending inventory in units and in dollars for each production level.
Requirement 2	50,000 books	65,000 books	70,000 books
Beginning Inventory	0	0	0
Production	50000	65000	70000
Sales	50000	50000	50000
Ending Inventory	0	15000	20000
Cost Per Book (100+ 15)	115	115	115
Cost of Ending Inventory	0	1725000	2300000
Requirement 3: Managers who are paid a bonus that is a function of gross margin may be inspired to produce a product in excess of demand to maximize their own bonus. There are metrics to discourage managers from producing products in excess of demand. Do you think the following metrics will accomplish this​ objective? Show your work.
a. Incorporate a charge of 10% of the cost of the ending inventory as an expense for evaluating the manager.	50,000 books	65,000 books	70,000 books
Gross Margin	2250000	2475000	2550000
Ending inventory charge	0	-172500	-230000
Adjusted gross margin	2250000	2302500	2320000
b. Include nonfinancial measures when evaluating management and rewarding performance.
One nonfinancial measure is to compute the excess production ratio. Determine the formula, then compute the ratio at each production level.
# of books Production / Sales = Excess production ratio	Production /	Sales Units	Excess Production Ratio
	50,000.00	50000	1
	65,000.00	50000	1.3
	70,000.00	50000	1.4
A ratio of ending inventory to beginning inventory is Not Possible
The non-financial measures must be incorporated into the reward function of the manager to be useful.