Reference no: EM132715683

(Governance, manager's performance evaluation - A. Spero, adapted)

Schomberg Milk Products manufactures and sells organic Balcanic style yogurt. Each box of 48 yogurts is sold for $30. Schomberg's manufacturing costs per box of 48 yogurts consist of the following:

Raw milks $ 8.00

Fruits and flavours $ 1.50

Other variable $ 6.50

Total variable cost $16.00

Schomberg Milk Products calculates operating income using absorption costing-that is, Schomberg Milk Products calculates manufacturing fixed costs per box by dividing total manufacturing costs by actual production. Schomberg Milk Products costs all units in inventory at this rate and expenses the costs in the income statement only when the units in inventory are sold.

The details of fixed costs per quarter are as follows:

Fixed manufacturing costs $1,000,000

Fixed administrative costs $ 150,000

Fixed marketing costs $ 300,000

Total fixed costs $1,000,000

The next year quarter appears to be a difficult one for Schoberg Milk Products. It expects to sell only 100,000 boxes. The demand for this specialty yogurt fluctuates considerably with general economic conditions in the economy. Schomberg Milk Products, like most of the companies in this industry, usually holds minimal inventory.

Required

Problem 1. Calculate Schomberg Milk Products's operating income in the next quarter if it manufactures (a) 100,000 boxes and (b) 125,000 units.

Problem 2. Would it be unethical for the general manager of Schomberg Milk Products to produce more boxes than can be sold in order to show better operating results? The manager's compensation has a bonus component based on operating income. Explain your answer.

Problem 3. Would it be unethical for the manager to ask distributors to buy more product than they need? Schomberg Milk Products follows the industry practice of booking sales when products are shipped to distributors. Explain your answer.