Ethics and Fixed costs for Techono Enterprises
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1. Techono enterprises is a manufacturer of microchips. Their production process is complex and involves more than 100 steps, starting with production of small, round silicon wafers and ending with chips being put into individual packages that protect them and provide connections to the products for which the chips are developed. The company uses a process costing system and has always made the simplifying assumption that wafers in production, but not yet finished, are 50% complete with respect to conversion costs.
In the current year, the company has struggled due to a decline in computer sales and reduced demand for chips. To boost profit, the company has decided to start a very large number of wafers into production in the last few days of the year. Due to the use of ceramic carriers and other high performance features, the Techno Enterprises production process typically takes 30 days.
REQUIRED - Explain why starting a large number of wafers into production will boost even though the chips that ultimately result from the wafers are ones that have not been sold or even completed. Is the company's approach to boosting profit ethical?
2. Audrey Bard is planning on opening a 3,000 square foot restaurant in Columbus, Ohio. As a small business owner, Audrey is concerned about controlling her mix of fixed and variable costs. As Audrey noted, "if I have too much fixed cost and sales don't take off right away, I'll have tremendous losses and may even go bust"
REQUIRED - Expand on Audrey's comment. Why is crucial that small businesses limit their exposure to fixed costs? Identify a way that Audrey can turn potential fixed costs in to variable costs.
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Solution Summary
Ethics and fixed costs for Techono Enterprises manufacturing microchips is analyzed.
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Ans:
Techno enterprises manufacture microchips and use the process costing system. The company values the work in progress as 50% complete (with respect to conversion costs) for the purpose of ascertaining the equivalent production to determine the cost per unit. The company has decided to start a very large number of wafers in production to boost up the sales. However, there is existence of economic recession and slow down in the sales which will reduce the profit. The intention behind production of large number of chips by starting very large number of wafers is to show the huge ...
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