2. To maximize the Brazilian Division’s operating income, Mr. Cavalas could
produce as many units as storage facilities will allow. By building inven-
tory to the maximum level, Mr. Cavalas will be able to defer a portion of
the year’s fixed manufacturing overhead costs to future years through
the inventory account, rather than having all of these costs appear as
charges on the current year’s income statement. Building inventory to
the maximum level of 1,000 units would require production as follows
during the last quarter:
Desired inventory, December 31 ... 1,000 units
Expected sales, last quarter ... 600 units
Total needs... 1,600 units
Less inventory, September 30... 400 units
Problem 7-16 (continued)
Thus, by producing enough units to build inventory to the maximum
level that storage facilities will allow, Mr. Cavalas could relieve the cur-
rent year of fixed manufacturing overhead cost and thereby maximize
the current year’s operating income.
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