Problem - Agrigento Industries is a multiproduct company with several manufacturing plants. The Catania Plant manufactures and distributes two types of household cleaning and polishing compounds -- Regular and Heavy-Duty -- under the Clean-Bright label. The forecasted operating results for the first six months of 2005, when 100,000 cases of each are expected to be manufactured and sold, are presented in the following table:
Clean-Bright Compounds
Catania Plant
Forecasted Results of Operations
For the Six-Month Period Ending June 30, 2005
(all dollar amounts are in thousands)
|
|
Regular
|
Heavy-Duty
|
Total
|
|
Sales Revenue
|
$2,000
|
$3,000
|
$5,000
|
|
Cost of Sales
|
(1,600)
|
(1,900)
|
(3,500)
|
|
Gross Profit
|
$400
|
$1,100
|
$1,500
|
|
Nonmanufacturing Costs:
|
|
|
|
|
Variable
|
(400)
|
(700)
|
(1,100)
|
|
Fixed *
|
(240)
|
(360)
|
(600)
|
|
Total Nonmanufacturing Costs
|
(640)
|
(1,060)
|
(1,700)
|
|
Income (Loss) before Taxes
|
$ (240)
|
$ 40
|
$ (200)
|
*The fixed nonmanufacturing costs are allocated between the two products on the basis of dollar sales volume on these internal reports. None of these could be avoided by discontinuing either product.
The Regular compound is projected to sell for $20 a case and the Heavy-Duty compound is projected to sell for $30 a case during the first six months of 2005. The manufacturing costs by case of product are summarized in the schedule below. Each product is manufactured on a separate production line. Annual manufacturing capacity is 400,000 cases of each product. However, the plant is capable of producing either 500,000 cases of Regular compound or 700,000 cases of Heavy-Duty compound by retooling the individual assembly lines.
|
|
Manufacturing Cost
|
(per Case)
|
|
|
Regular
|
Heavy-Duty
|
|
Direct Materials
|
$5.00
|
$8.00
|
|
Direct Labor
|
4.00
|
5.00
|
|
Variable Manufacturing Overhead
|
1.00
|
2.00
|
|
Fixed Manufacturing Overhead**
|
6.00
|
4.00
|
|
Total Manufacturing Costs
|
$ 16.00
|
$19.00
|
|
Variable Nonmanufacturing Costs
|
$ 4.00
|
$7.00
|
**$300,000 of the fixed manufacturing costs of Regular and $100,000 of the fixed manufacturing costs of Heavy-Duty could be avoided during the six month period if the respective product line were discontinued. Fixed manufacturing overhead is assigned on a per unit of production bases.
Required:
1. Prepare a contribution margin income statement, showing the projected income for each product line, and for the company as a whole, for the first six months of 2005 based on the Forecasted Results of Operations presented on the previous page.
2. Determine the break-even number of cases for each product line and the total revenue necessary to break-even during the first six months of 2005 if the product mix is unchanged.
3. Determine the break-even number of cases (and sales revenue) if only one product line is sold during the first six months of 2005. Do this separately for both the Regular and Heavy-Duty lines.
4. If Agrigento received a one-time order for 50,000 units of Regular compound during the six-month period, what is the lowest price that it could accept without reducing its income? Assume that no other sales would be affected.
5. If a customer wanted to purchase $36,000 worth of product (either Regular or Heavy-Duty, the customer is indifferent), what combination of cases of each would maximize Agrigento's profit?