Product Choice (R. Jaedicke.) The Borg Company manufactures a type of raw sheet metal that can be sold at this stage or that can be processed more and sold as a type of alloy used in manufacturing high-grade control systems of various types. The raw-sheet-metal market is such that the entire output can be sold at the market price, which at the present time is $100 per ton. The processed selling price has been about $180 per ton for several years, but recently the market has been weak and on several occasions the price has dropped as low as $140. This has caused the sales manager to suggest that the alloy is no longer profitable and should be dropped. He feels that the entire capacity should be used to produce the raw metal. His suggestion is prompted by the following data:

COST PER TON COST PER TON OF RAW SHEET METAL OF ALLOY Raw materials $ 50 Direct labor 10 Overhead 30 Cost per ton $ 90 $ 90 Selling value 100 Profit $ 10 Processing cost:

Additional materials 20 Direct labor 10 Overhead 30 Cost per ton of alloy $150 Selling value of alloy 140 Loss ($ 10)

The sales manager argues that, because of a $10 loss per unit of alloy, the product should be dropped any time the price per ton falls below $150.

In the cost calculations, the raw materials and the labor costs are variable.

The overhead rate per unit is calculated by estimating the total overhead for the coming year and dividing this total by the total hours of capacity available. The total overhead is, for the most part, a fixed cost.

. Should the alloy be dropped and the entire production facility be used to produce raw metal if the price per ton of alloy for the coming year is estimated to be $140? Support your conclusion with an appropriate analysis.

. Prepare an analysis to aid the sales manager in determining the lowest alloy price that would be acceptable to the company.

. Assume that the total overhead for the company is about 50 percent fixed, 50 percent variable. Would you accept the $140 offer for alloy? Why? What would be the lowest acceptable price for the alloy?

Note: You may find it helpful to assume that the total hours of capacity available are 1,000,000. It takes one hour to make a ton of raw sheet metal and one hour of additional processing to make a ton of alloy. The total available capacity is interchangeable. lop5