Problem:
XYZ Co uses an absorption cost system to apply production costs to units produced. The plant has a maximum production capacity of 4 million units, but only 1 million units were produced and sold in 2019 - there was no beginning or ending inventory for 2019. Income statement for 2019 below: XYZ's executive team is very concerned about 2019's dismal financial performance. One of the executives knows an outside consultant who said, "If you make me President, I can turn things around for you if you agree to a one-year contract. You do not have to pay me a salary, but I want 25% of the operating profit." XYZ enthusiastically hired the consultant as the new President. The new President increased production in 2020 to 3,000,000 units, while sales remained the flat. XYZ's absorption costing income statement for 2020 is below: As soon as the consultant's check for $229,000 cleared the bank, they resigned as President of XYZ stating, "Now that I have turned XYZ around, it is time for me to move on and rescue another company."
Required:
- What did the consultant do to "rescue" XYZ?
- Is XYZ in a better or worse spot than it was?