question archive Kaiser Company just hired its fourth production manager in three years
Kaiser Company just hired its fourth production manager in three years
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Kaiser Company just hired its fourth production manager in three years. All three previous managers had quit because they could not get the company above the break-even point, even though sales had increased somewhat each year. The company was operating at about 60 % of plant capacity. The flatware industry was growing, so increased sales were not out of the question.
I. R. Thinking took the job as manager of the production division with a very attractive salary package. After interviewing for the position, he proposed a salary and bonus package that would give him a very small salary but a large bonus if he took the operating income (using absorption costing) above the breakeven point during his very first year.
Required:
What do you think Mr. Thinking had in mind for increasing the company's operating income?
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Answer:
Mr. Thinking realized that he could probably increase both production and sales during the coming year. If he substantially overproduced he knew that the extra costs would be hidden in unsold inventory. If the new production level could be sold by the sales force in the growing market, the profits would increase anyway and everybody would be happy.
Also, he could combine increased production with reduced fixed manufacturing costs such as maintenance. In the short run, several combinations could be undertaken by Mr. hinking to ensure that the profit picture would improve.
