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work in process inventories. Mary: I don’t know if I can do that, Gary.
Those percentage completion figures are supplied by Tom
Winthrop, my lead supervisor, who I have always trusted to provide us
with good estimates.
Besides, I have already sent the percentage completion figures to
corporate headquarters. Gary: You can always tell them there was a
mistake. Think about it, Mary. All of us managers are doing as much as
we can to pull this bonus out of the hat. You may not want the bonus
check, but the rest of us sure could use it.
The final processing department in Mary’s production facility began the
year with no work in process inventories. During the year, 210,000 units
were transferred in from the prior processing department and 200,000
units were completed and sold. Costs transferred in from the prior
department totaled $39,375,000. No materials are added in the final
processing department. A total of $20,807,500 of conversion cost was
incurred in the final processing department during the year.
Required:
1. Tom Winthrop estimated that the units in ending inventory in the final
processing department were 30% complete with respect to the
conversion costs of the final processing department. If this estimate of
the percentage completion is used, what would be the Cost of Goods
Sold for the year? (Note: Since all units completed were sold, the cost of
goods transferred out = Cost of Goods Sold.)
2. Gary is recommending that the completion percentage by adjusted by
10 percentage points in order to assist the team in making their bonus.
a. Calculate the cost of goods sold if the ending inventory is 20%
complete in regard to conversion costs. Would net income increase or
decrease if this option was chosen over the 30% completion percentage?
How much is the increase?
b. Calculate the cost of goods sold if the ending inventory is 40%
complete in regard to conversion costs. Would net income increase or
decrease if this option was chosen over the 30% completion percentage?
How much is the increase?
c. Based on your calculations, which percentage is Gary suggesting that
Mary use for her ending inventory calculations.