Montgomery is in the process of renewing their $12 million loan with the bank. They had $500,000 of net income and had under-absorbed overhead at the end of the year in the amount of $400,000. Their policy is to allocate the under-absorbed overhead to inventory (75%) and to cost of goods sold (25%).
a) If you were on the management team at the bank, would the information have presented change your viewpoint of extending the loan? Why or why not?
b) What questions would you ask of management at Montgomery?