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Units
in sales
Breakeven
overhead
manuf. Fixed
operating
Target
fixed Total
−
+
+
Absorpting
costing
operating
–
Variable
costing
operating
=
Fixed
manuf. costs in
ending
–
Fixed
manuf. costs in
beginning
26,000
Books
32,500
Books
33,800
Books
Gross margin $520,000 $624,000 $644,800
Less 10% Ending inventory 0 (19,825) (23,790)
Adjusted gross margin $520,000 $604,175 $621,010
While adjusting for ending inventory does to some degree mitigate the increase in inventory
associated with excess production, 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.
3b.
26,000
Books
32,500
Books
33,800
Books
1) Inventory change:
End inventory ─ begin inventory 0 6,500 books 7,800 books
2) Excess production (%)
Production ÷ sales 26,000 ÷ 26,000 32,500 ÷ 26,000 33,800 ÷26,000
1.0 1.25 1.3
• A ratio of ending inventory to beginning inventory, as suggested in the book, is not
possible because beginning inventory was zero, so we substituted change in inventory
level.
For these nonfinancial measures to be useful they must be incorporated into the reward function
of the manager.
Theoretical capacity
$6.50
$30.20a
$36.70
$17,355,000
$9,345,000
U
Practical capacity
7.86
30.20
38.06
20,986,200
5,713,800
U
Normal capacity utilization
9.78
30.20
39.98
26,112,600
587,400
U
a $80,634,000
2,670,000 barre
