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Explain why an increase in production

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Problem - Ken is a production manager of Vintage Watch Ltd, that manufacture and sell fitness watches. The company uses an absorption costing system for valuing Inventories. In the company's final production scheduling meeting in 2018, Ken suggested that they increase production of their watches in December to bring the total production to 5000 watches. This increased production was possible with the existing production capacity of their factory. Ken explained that an increase in production of watches would lead to higher profit even without higher levels of sales, In the end, this suggestion was not implemented by the company and the total units of watches produced in 2018 was 4,000 units.

Required -

a. Explain why an increase in production without a corresponding increase in sales would generally lead to higher profit for an entity that uses absorption costing. Calculations are not necessary.

b. Is this suggestion by Ken ethical? Briefly explain why or why not?

c. What are TWO potential adverse consequences for Vintage Watch Led if this suggestion was implemented?

Reference no: EM132981516

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