Question 1, and 2 have been answer. Now, I need help with question 3 , and 4. Please explain step by step . Thank you. As mentioned in the employment contract, Joh would get $1,000 for every 1% increase in the operating income over the previous year's operating income.Therefore,Operating Income in 2018 = $300,000Operating Income in 2019 = $480,000Increase in Operating Income = $480,000 - $300,000Increase in Operating Income = $180,000Percentage increase in operating income over 2018 = $180,000/$300,000 = 60%John would get $1,000 for every 1% increase. The total increase is 60%.Hence, Joh would get a bonus of $60,000 in 2019 (60% increase)Step 2 Variable Costing vs Absorption costingWe know that the selling price and the variable cost per unit have remained the same for 2018 and 2019.We also have the following data,Particulars20182019Operating Income$300,000$480,000Units Produced25,000 29,000Units Sold 25,000 25,000Fixed Manufacturing Overhead$1,305,000$1,305,000Right now the company used the full costing method or absorption costing method.Absorption costing takes into account all manufacturing costs as product costs. For Eg: Fixed manufacturing overheads will be a part of product cost. This works well then there is no inventory, as all the costs get expensed. But when there is closing inventory, in absorption costing a part of the fixed cost gets carried over to the balance sheet and hence doesn't get expensed in the Income statement.This leads to higher profits or operating income.Variable Costing on the other hand only considers variable manufacturing overheads as product cost and treats every other cost as a period cost. ie Fixed Manufacturing would be fully expensedSincewe don't have the exact numbers, lets back-calculate the sales and variable cost per unitIn 2018, we get $300,000 Operating Income.Therefore, Contribution = OI + Fixed Cost = $300,000 + $1,305,000 = $1,605,000Therefore per unit contribution = $1,605,000/25,000 = $64.2Let the Sale price be $100 per unit.Hence, Variable cost will be $100-$64.2 = $35.8Now, under absorption costing, product cost would be in 2018 Variable Cost p.u. = $35.8Add: Fixed Cost p.u.= $1,305,000/25,000 = $52.2Total Product Cost = $88In 2019, product cost will be:Variable Cost p.u. = $35.8Add: Fixed Cost p.u.= $1,305,000/29,000 = $45 (Since 29,000 have been produced)Total Product Cost = $80.8The product cost has reduced hence, there has been an increase in the operating income since 4,000 units are in the closing inventory and not expensed. This is unethical due to the actions of JohnStep 3 Statement under variable costingNow we have understood the difference, let's recalculate the result using variable costing.Product cost in variable costing = $35.8 per unit (Since only variable manufacturing overheads are considered)Particulars20182019Sales (25,000*$100)$2,500,000$2,500,000(-) Cost of Goods Sold (25,000*$35.8)$895,000$895,000Contribution$1,605,000$1,605,000(-) Fixed Manufacturing Overhead$1,305,000$1,305,000Operating Income$300,000$300,000No, difference in the operating Income in the both years Modesto Junior College - XSA-4Ethics-The Bonus.pdfM MHE Readerb Reflect on what you have X +O File | /home/chronos/u-5d428c891f47f3e3eba23364e55c29422c743a66/MyFiles/Downloads/Ethics-The%20Bonus.pdfCompany A hired John during January 2019 to manage its commercial products division. As part of hisemployment contract, John is guaranteed $1,000 bonus for every 1% increase in division's operatingincome for the current year over that of the prior year.In prior years, the commercial products division employed just-in-time inventory practices; it producedunits only as they were needed and had no inventory on hand when John started. John directed hisplant managers to run the plants at full capacity. John's reasoning was that, in the past, the companymissed out on too many sales opportunities because of inventory shortages.The selling price and variable costs per unit remained the same from 2018 to 2019.Below is the data for 2018 and 201920182019$480,000Operating Income$300,000Units ProducedUnits Sold25,00029,00025,000$1,305,00025,000Fixed manufacturing overhead costs$1,305,000Instructions You must show your work. You may not just write the final answers. Explain the conceptsand principles you used to come up with your answers.1. Calculate John's bonus for 2019 based upon the operating income shown above.2. Recompute the 2018 and 2019 results using variable costing.3.ulate John's bonus for 2019ariable costing.4. Did John act ethically? What actions should the company take?2:02...

Question

Question 1, and 2 have been answer. Now, I need help with question 3 , and 4. Please explain step by step . Thank you. As mentioned in the employment contract, Joh would get $1,000 for every 1% increase in the operating income over the previous year's operating income.Therefore,Operating Income in 2018 = $300,000Operating Income in 2019 = $480,000Increase in Operating Income = $480,000 - $300,000Increase in Operating Income = $180,000Percentage increase in operating income over 2018 = $180,000/$300,000 = 60%John would get $1,000 for every 1% increase. The total increase is 60%.Hence, Joh would get a bonus of $60,000 in 2019 (60% increase)Step 2 Variable Costing vs Absorption costingWe know that the selling price and the variable cost per unit have remained the same for 2018 and 2019.We also have the following data,Particulars20182019Operating Income$300,000$480,000Units Produced25,000 29,000Units Sold 25,000 25,000Fixed Manufacturing Overhead$1,305,000$1,305,000Right now the company used the full costing method or absorption costing method.Absorption costing takes into account all manufacturing costs as product costs. For Eg: Fixed manufacturing overheads will be a part of product cost. This works well then there is no inventory, as all the costs get expensed. But when there is closing inventory, in absorption costing a part of the fixed cost gets carried over to the balance sheet and hence doesn't get expensed in the Income statement.This leads to higher profits or operating income.Variable Costing on the other hand only considers variable manufacturing overheads as product cost and treats every other cost as a period cost. ie Fixed Manufacturing would be fully expensedSincewe don't have the exact numbers, lets back-calculate the sales and variable cost per unitIn 2018, we get $300,000 Operating Income.Therefore, Contribution = OI + Fixed Cost = $300,000 + $1,305,000 = $1,605,000Therefore per unit contribution = $1,605,000/25,000 = $64.2Let the Sale price be $100 per unit.Hence, Variable cost will be $100-$64.2 = $35.8Now, under absorption costing, product cost would be in 2018 Variable Cost p.u. = $35.8Add: Fixed Cost p.u.= $1,305,000/25,000 = $52.2Total Product Cost = $88In 2019, product cost will be:Variable Cost p.u. = $35.8Add: Fixed Cost p.u.= $1,305,000/29,000 = $45 (Since 29,000 have been produced)Total Product Cost = $80.8The product cost has reduced hence, there has been an increase in the operating income since 4,000 units are in the closing inventory and not expensed. This is unethical due to the actions of JohnStep 3 Statement under variable costingNow we have understood the difference, let's recalculate the result using variable costing.Product cost in variable costing = $35.8 per unit (Since only variable manufacturing overheads are considered)Particulars20182019Sales (25,000*$100)$2,500,000$2,500,000(-) Cost of Goods Sold (25,000*$35.8)$895,000$895,000Contribution$1,605,000$1,605,000(-) Fixed Manufacturing Overhead$1,305,000$1,305,000Operating Income$300,000$300,000No, difference in the operating Income in the both years Modesto Junior College - XSA-4Ethics-The Bonus.pdfM MHE Readerb Reflect on what you have X +O File | /home/chronos/u-5d428c891f47f3e3eba23364e55c29422c743a66/MyFiles/Downloads/Ethics-The%20Bonus.pdfCompany A hired John during January 2019 to manage its commercial products division. As part of hisemployment contract, John is guaranteed $1,000 bonus for every 1% increase in division's operatingincome for the current year over that of the prior year.In prior years, the commercial products division employed just-in-time inventory practices; it producedunits only as they were needed and had no inventory on hand when John started. John directed hisplant managers to run the plants at full capacity. John's reasoning was that, in the past, the companymissed out on too many sales opportunities because of inventory shortages.The selling price and variable costs per unit remained the same from 2018 to 2019.Below is the data for 2018 and 201920182019$480,000Operating Income$300,000Units ProducedUnits Sold25,00029,00025,000$1,305,00025,000Fixed manufacturing overhead costs$1,305,000Instructions You must show your work. You may not just write the final answers. Explain the conceptsand principles you used to come up with your answers.1. Calculate John's bonus for 2019 based upon the operating income shown above.2. Recompute the 2018 and 2019 results using variable costing.3.ulate John's bonus for 2019ariable costing.4. Did John act ethically? What actions should the company take?2:02...

Accepted Answer

As mentioned in the employment contract, Joh would get $1,000 for every 1% increase in the operating…

Particulars	2018	2019
Operating Income	$300,000	$480,000
Units Produced	25,000	29,000
Units Sold	25,000	25,000
Fixed Manufacturing Overhead	$1,305,000	$1,305,000