Roland Anderson is the manager of the Ekland Division of Ystad Industries and has some decisions to make based on accounting data. Anderson is also being considered for the CEO position of the company which makes his dilemma even greater. He is unhappy with the profitability for the first quarter and is considering maxing out the capacity of the operation in the second quarter. It was found that Anderson actually performed fairly well based on the assumption that his actual costs were below the variable costs provided in the case using the contribution method. Doubling the production plan would be an unwise move given the fact that the sales forecast is only for twenty five thousand units. Thus if he produces fifty thousand units he would have greater inventory and it is likely that he would have to cease operations and let some workers take a vacation or something until the inventory levels are significantly reduced. Given the fact that Anderson is even considering this strategy implies that he is entirely unfit to be the future CEO.
Accounting for Decision Making
Roland Anderson is the manager of the Ekland Division of Ystad Industries and has some decisions to make based on accounting data. Anderson is also being considered for the CEO position of the company which makes his dilemma even greater. He is unhappy with the profitability for the first quarter and is considering maxing out the capacity of the operation in the second quarter. It was found that Anderson actually performed fairly well based on the assumption that his actual costs were below the variable costs provided in the case using the contribution method. Doubling the production plan would be an unwise move given the fact that the sales forecast is only for twenty five thousand units. Thus if he produces fifty thousand units he would have greater inventory and it is likely that he would have to cease operations and let some workers take a vacation or something until the inventory levels are significantly reduced. Given the fact that Anderson is even considering this strategy implies that he is entirely unfit to be the future CEO.
Contribution Margin Comparison
The following Income Statement was prepared using the contribution margin. Since the variable rate was fifty dollars per unit and the fixed overhead was half a million then the costs of producing twenty five thousand units was $1,750.000. Given the fact that the actual costs under the absorption model were $1,562,000, this works out to a per unit cost of less than fifty dollars per unit with the same level of fixed costs ($42.48).
Ekland Division
Income Statement
Quarter Ending March 31, 2011
Production 25,000 Units
Absorption
Contribution Margin
Sales
2,500,000.00
2,500,000.00
COGS
1,750,000.00
Beginning Inventory
625,000.00
Production Costs Applied
1,562,000.00
Total
2,187,000.00
Less Ending Inventory
625,000.00
156,200.00
Gross Profit
938,000.00
750,000.00
Selling and General Expenses
500,000.00
500,000.00
Net Income
438,000.00
250,000.00
Discussion
Roland would not have improved his performance in the second quarter since the variable cost was higher than the actual cost per unit that he achieved in the first quarter. Not only did the cost per unit rise in the second quarter, but this strategy would have undoubtedly caused some production planning nightmares in the third and fourth quarters as the production rates would have to be dropped to minimize the inventory levels. Roland should definitely not be considered for the CEO position and also might be a prime candidate for a demotion.
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