1. If Mr.

Hoffman expects to sell 1,200 devices this year and his bonus is based on
reported accounting earnings, he would like to see Navisky produce as many
units as possible to absorb the fixed manufacturing overhead costs. Since the
plant can produce up to 1,500 units without any increase in the variable
manufacturing costs per unit, Mr. Hoffman would like to see Navisky produce
1,500 units.
2. If Mr. Hoffman’s bonus calculation includes a charge for inventory holding costs
at 20 percent of the ending inventory value, he would prefer to minimize the
ending inventory to reduce the inventory holding costs. Therefore, he would like
to see Navisky produce exactly the number of units he expects to sell, which is
1,200 units.
3. The difference in the answers to parts (b) and (c) is due to the inclusion of
inventory holding costs in the bonus calculation in part(c). In part (b), Mr.
Hoffman’s bonus is maximized by producing more units to absorb the fixed
manufacturing overhead costs. However, in part (c), producing more units than
expected sales would result in higher inventory holding costs, which would
reduce his bonus.
4. If Navisky’s net income is calculated using variable costing and net income
includes a 20 percent inventory holding cost, the fixed manufacturing overhead
costs would not be included in the product costs. Therefore, producing more
units would not reduce the cost per unit. In this case, Mr. Hoffman would also
prefer to produce exactly the number of units he expects to sell to minimize the
inventory holding costs, which is 1,200 units.