Reference no: EM132848293

Question - Myrmidon Corp. provides shields for barbaric security services. Brisies, the manager of a division of Myrmidon Corp. recently received a call from senior management that there is an incentive promotion that will pay a bonus of 10% of before-tax profits in the second quarter of 2021 if the profit is positive, and 0 otherwise. Myrmidon Corp. uses full absorption costing to determine the before-tax income.

Her estimated costs are as follows:

Fixed Costs for the quarter

Management salaries not associated with production $50,000

Rent of the manufacturing plant $50,000

Utility charges for the manufacturing plant $15,000

Variable Costs Rates

Sales Commissions $30/shield sold

Maintenance on manufacturing plant $50/shield

Direct Materials $400/shield

Direct Labor $125/shield

Brisies anticipates selling 500 shields in the second quarter of 2021 at a unit price of $800/shield.

Note: Do not consider the "bonus" as part of the costs in your analysis.

Required -

1. Assuming that Brisies has no inventory at the beginning of the period, what would be the COGM/u for the quarter if the company produces and sells 500 shields?

2. Assuming that Brisies has no inventory at the beginning of the period, what would be Brisies's profit for the quarter if she produced and sold 500 shields?

3. Assuming that Brisies has no inventory at the beginning of the period, what would be Brisies's COGM/u for the quarter if she produced 1,000 shields, but still sold 500 shields?

4. Assuming that Brisies has no inventory at the beginning of the period, what would be Brisies's profit for the quarter if she produced 1,000 shields, but still sold 500 shields?

5. What does the bonus structure encourage Brisies to do?

6. If Brisies were to produce 1,000 shields and sell 500 shields, but her bonus structure were based on pre-tax profits under a variable costing system, what would her bonus be?

7. What is the primary reason for the difference in Net income between producing 500 shields and producing 1,000 shields, holding constant sales at 500 shields?

8. Based on your analysis above, how would you adjust the contract with Brisies?