Special order) Clean-N-Brite is a multiproduct company with several manufacturing plants. The Cincinnati plant manufactures and distributes two household cleaning and polishing compounds, regular and heavy duty, under the HouseSafe label. The forecasted operating results for the first six months of 2006, when 100,000 cases of each compound are expected to be manufactured and sold, are presented in the following statement:

The sales price per case for the regular compound is $20 and for the heavy duty is $30 during the first six months of 2006.
The manufacturing costs by case of product follow.

Each product is manufactured on a separate production line. Annual normal manufacturing capacity is 200,000 cases of each product. However, the plant is capable of producing 250,000 cases of regular compound and 350,000 cases of heavy-duty compound annually.
The following schedule reflects top management consensus regarding the price/volume alternatives for the HouseSafe products for the last six months of 2006, which are essentially the same as those during its first six months.

Top management believes the loss for the first six months reflects a tight profit margin caused by intense competition and that many competitors will be forced out of this market by next year, so the company’s profits should improve.

a. What unit selling price should Clean-N-Brite select for each HouseSafe compound for the remaining six months of 2006? Support your answer with appropriate calculations.

b. Without prejudice to your answer for requirement (a), assume that the optimum price/volume alternatives for the last six months were a selling price of $23 and volume level of 50,000 cases for the regular compound and a selling price of $35 and volume of 35,000 cases for the heavy- duty compound.
1. Should Clean-N-Brite consider closing its operations until 2007 to minimize its losses? Support your answer with appropriate calcula¬ tions.
2. Identify and discuss the qualitative factors that should be considered in deciding whether the Cincinnati plant should be closed during the last six months of 2006.
(CMA adapted)

Transcribed Image Text:

Sales HOUSESAFE COMPOUNDS-CINCINNATI PLANT Forecasted Results of Operations For the Six-Month Period Ending June 30, 2006 Cost of sales Gross profit Selling and administrative expenses Variable Fixed* Total selling and administrative expenses Income (loss) before taxes Regular $ 2,000 (1,600) $ 400 $ 400 240 $ (640) $ (240) (IN $000) Heavy-Duty $ 3,000 (1,900) $1,100 $ 700 360 $(1,060) $ 40 Total $ 5,000 (3,500) $ 1,500 $ 1,100 600 $(1,700) $ (200) *The fixed selling and administrative expenses are allocated between the two products on the basis of dol- lar sales volume on the internal reports.