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The Outdoor Division of Rugged Inc. uses absorption costing for profit reporting. The general manager of the Outdoor Division is concerned about...
The Outdoor Division of Rugged Inc. uses absorption costing for profit reporting. The general manager of the Outdoor Division is concerned about meeting the income objectives of the division. At the beginning of the reporting period, the division had an adequate supply of inventory. The general manager has decided to increase production of goods in the plant in order to allocate fixed manufacturing costs over a greater number of units. Unfortunately, the increased production cannot be sold and will increase the inventory. However, the impact on earnings will be positive because the lower cost per unit will be matched against sales. The General Manager has come to Bill Clark, the controller, to determine exactly how much additional production is required to meet the division's profit objectives. Clark analyzes the data and determines that the inventory will need to be increased by 30% in order to absorb enough fixed costs and meet the income objective. Clark reports this information to the general manager. After additional thought, Clark thinks he may have made a mistake so he emails the President informing him of what the general manager requested and what he (Clark) has done.
