Blue and Green are competitors that manufacture and sell pencils in the same market.

Their presidents have different philosophies about production: Blue’s president prefers to use robotized machines for labor-intensive tasks, while Green’s president prefers to maintain a large work force and avoid the expenditure of capital funds for expensive equipment.

The following data summarizes the respective costs of the two companies.

1. Fixed costs for Blue are $1,500,000 per year, and for Green, $870,000 per year.
2. The selling price for a gross of pencils is expected to remain at the present level of $20.
3. Normal output and sales for both companies is 200,000 gross of pencils per year.
Required:

a. Compute the expected results for both companies at the normal level of output and explain why one company outperformed the other.

b. Assume that the sales outlook for next year is bleak and each company will produce and sell only 90,000 gross of pencils. Compute their respective profits or losses; if one company would outperform the other, explain why.

c. At what level of production would both companies have the same results?

d. Which company’s president would most likely be willing to reduce the sales price to obtain a larger volume of sales? Why?

Transcribed Image Text:

Cost per Gross of Pencils Blue Green Materials $3.00 $3.00 Labor $1.50 $6.00 Variable manufacturing overhead $ .50 $1.00