discussion post question

Stacy Lynn, Inc. (SLI) is a manufacturer of rice cookers. The rice cookers sell for $45 per unit; the sales were 3,600 units in the current year. SLI has 400 units available for sale at the end of the current year and is projecting sales of 4,400 units next year. SLI is planning the same production level for the current year as last year - 4,000 units. The variable manufacturing costs for SLI are $16 and the variable selling costs are only $.50 per unit. The fixed manufacturing costs are $100,000 per year and the fixed selling costs are only $500 per year. Assume that beginning inventory was -0-.

Stacy Ann Lynn, the great grand-daughter of the company’s founder is the current CEO/President of the company, which is still a family-owned business. The past several years have been especially difficult due to price-pressure from Chinese imports. At the moment, all that Stacy believes she can do is to try to keep the company running until the economy improves. But, the company needs an immediate infusion of cash. So, she has decided to ask her bank for a large line of credit to maintain operating viability for the foreseeable future.

Based on the information provided in the narrative above, and the financial statements below, post a response to each Part below:

Part A) If Stacy Lynn wants to show the bank the maximum profit over the previous 2-year period, which costing method should be presented?

Part B) But, the bank requires that all financial statements conform to Generally Accepted Accounting Principles (GAAP). Based on that requirement, which costing method should be presented?

Part C) The bank has delivered a memo to SLI in preparation for the meeting to negotiate the Credit Line; the memo states that they will expect a significant Net Income. Based on your responses to Parts A and B, what are the legal and ethical issues facing Stacy Lynn?

Current Income Statement:

Using Full Using Variable

Costing Costing .

Item:

Sales (4,400 x 45) $198,000 $198,000

Cost of Goods Sold:

Beg. Inv. $ 16,400 $ 6,400

COGM 164,000 64,000

COGAS 180,000 70,400

End. Inv. 0 0

COGS 180,400 70,400

Less Variable Selling & Admin Expenses $ 2,200

Gross Margin $ 17,600

Contribution Margin $125,400

Less Fixed Mfg. Costs $ 100.000

Less Selling & Admin Costs

Variable $ 2,200

Fixed 500 2,700 500 100,500

Operating Income $ 14,900 $ 24,900