Lance Inc. is experiencing a buildup of inventory on an annual basis. Lance has hired...
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Accounting
Lance Inc. is experiencing a buildup of inventory on an annual basis. Lance has hired you to help understand why this is happening and how to correct it. Lance believes they have a competent management team that generates excellent results with respect to net income. Lance compensates its management team with both a competitive salary and bonus based on achieving a target net income. Lance Inc. has provided the following data for 2018:
Direct materials
$10
per unit
Direct labor
$15
per unit
Variable manufacturing overhead
$20
per unit
Fixed manufacturing overhead
$25,000
per year
Fixed selling and administrative costs
$15,000
per year
Sale price
$75
per unit
Beginning inventory
500
units
Units produced
5,000
units
Units sold
4,500
units
Required:
a) What are the possible reasons Lance is experiencing inventory buildup? You must support your answer.
b) What suggestion(s) do you have for Lance?
Answer & Explanation
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