Fanning Manufacturing Company CMC was started when it acquir

Fanning Manufacturing Company (CMC) was started when it acquired $92,000 by issuing common stock. During the first year of operations, the company incurred specifically identifiable product costs (materials, labor, and overhead) amounting to $57,200. CMC also incurred $66,000 of engineering design and planning costs. There was a debate regarding how the design and planning costs should be classified. Advocates of Option 1 believe that the costs should be classified as general, selling, and administrative costs. Advocates of Option 2 believe it is more appropriate to classify the design and planning costs as product costs. During the year, CMC made 4,400 units of product and sold 3,600 units at a price of $39.00 each. All transactions were cash transactions. Required a-1. Prepare an income statement and balance sheet under option 1 a-2. Prepare an income statement and balance sheet under option 2 b. Identify the option that results in financial statements that are more likely to leave a favorable impression on investors and c. Assume that CMC provides an incentive bonus to the company president equal to 13 percent of net income. Compute the amount d. Assume a 30 percent income tax rate. Determine the amount of income tax expense under each of the two options. Identify the creditors. of the bonus under each of the two options. Identify the option that provides the president with the higher bonus. option that minimizes the amount of the company\'s income tax expense. Complete this question by entering your answer in the tabs below Required A2 Bal Required A1 Required A1Required A2 R Required B Required C Required D Inc Stmt Bal Inc Stmt Assume that CMC provides an incentive bonus to the company president equal to 13 percent of net income. Compute the amount of the bonus under each of the two options. Identify the option that provides the president with the higher bonus Round your answers to the nearest whole dollar.) Option no. 1 bonus Option no. 2 bonus The option that provides the president with the higher bonus

Solution

Solution C:

The option that provides the president with the higher bonus is Option 2.

Compuation of Bonus - Option 1
Particulars		Amount
Sales	3600*$39	$140,400.00
Cost of goods sold	57200/4400*3600	$46,800.00
Gross profit		$93,600.00
General, selling and administrative cost		$66,000.00
Net Income		$27,600.00
Bonus (13%)		$3,588.00