Rick Green, President of Cambridge Quarrymen, has just received two requests for a price on two of Cambridge’s marble products. The first request was from a nearby city for 140,000 square metres, or approximately 2,000 tonnes, of paving stones. The second request was from a construction firm in Ohio, which requested a price on 3,000 tonnes of window sills of varying sizes. While Green was confident that a price of $300 a tonne for the paving stones and $500 a tonne for the window sills would result in Cambridge Quarrymen receiving the orders, he was unsure that these prices would result in a reasonable profit. 

Production Process 

As the decisions facing Green concerned marble products, only the production process related to these products will be described. Exhibit 7- 1A illustrates the following description of this process. First, limestone blocks are drilled and cut from a quarry. The top surface of the quarry is the side of the block; the dimensions are 75 centimetres by 210 centimetres. The depth of the block will vary depending upon the natural bed depth of the quarry, but lengths vary from one to three metres. The net result is limestone blocks that vary in size from four to 12 metric tonnes, with an average size being approximately eight tonnes. These limestone blocks are then trucked to Cambridge Quarrymen’s plant. The total direct cost of the limestone blocks is approximately $50 per tonne, which includes the removal and transportation costs. At the plant, each limestone block is positioned in front of a saw, which first cuts off two sides. These cuts will remove approximately one tonne of waste from an average eight-tonne block, leaving seven tonnes. Next, the saw operator must make a series of critical judgment calls as he or she cuts the limestone block into slices called product blocks. The saw operator must examine the face of the stone for cracks, pits, or other faults. If any are found, a cut approximately 20 centimetres wide will be made and the product block will be further processed into paving stones. If the limestone block is reasonably clear of faults, then a 15 centimetre cut will be made and the product block will be produced into window sills. If the stone is of highest quality, then cuts varying from six to 75 centimetres will be made to produce specialized products and hearth slabs. A fourth product line is referred to as larger units, where the quality may be low and these sections would otherwise be used for paving stones. However, if a wider cut is made, the stone can be used in place of some top-quality large pieces for some specific applications. The skill of the saw operator is extremely important, as a limestone block will normally produce many grades of products, and thus a judgment call is required after each cut is made. The cutting of the limestone block into product blocks results in an 80 percent yield of the seven tonnes, and the cutting costs per tonne of product block vary for each of four product lines as follows: paving stones $14 per tonne window sills $15 per tonne hearth slabs $10 per tonne large units $12 per tonne While a variance of 10 to 15 percent exists, it is expected that 10 percent of the product block tonnage will be in paving stones, 40 percent in window sills, 40 percent in hearth slabs, and 10 percent in large units. The processing of the product blocks into their designated final products first involves some additional sawing and splitting. Then, depending upon the quality of the final product, the stones are honed (smoothed) to produce the marble product. The extent of the processing varies by product line, and the ultimate yield will also vary by product line. The paving stones have a 50 percent yield, and the processing costs total $115 per tonne of finished product. The window sills have a yield of 48 percent with a processing cost of $180 per tonne of finished product. The waste from the window sills can be used for paving stones, and after a further processing cost of $65 per tonne of finished product, a yield of 21 percent of the waste is obtained. The hearth slabs are processed for a cost of $150 per tonne of finished product, which is a 65 percent yield of the product blocks. The large units result in a yield of 70 percent for a processing cost of $75 per finished tonne. The above description is the typical production process; however, it is possible to produce paving stones and window sills from higher-grade material. While the cutting and processing costs for the paving stones and window sills would remain the same, the yields would increase as follows. Window sills may be cut from the material that would normally be used for hearth slabs and large units, and the yields would increase by 10 percentage points to 75 percent and 80 percent, respectively. Similarly, paving stones may be cut from window-sill, hearth-slab, and large-unit materials with a 15 percentage point increase in yields to 63 percent, 80 percent, and 85 percent, respectively. In addition, the cutting of paving stones from window sill waste would increase to 31 percent. Green was, however, concerned that this alternate production process would not yield satisfactory profit margins. 

Exhibit 7-1A Cambridge Quarrymen Normal Production Process for Marble Products 

Situation Summary 

Green had been faced many times with similar situations. If 2,000 tonnes of paving stones are produced by means of the normal production process, more than the required quantities of window sills must also be produced. Furthermore, product blocks that will eventually be produced into hearth slabs and large units must also be cut even though they are not currently required. However, if the limestone blocks were cut into only paving stones, only window sills, or both paving stones and window sills, the higher-quality material would be used where lowerquality material would meet the customer requirements. The market for these marble products was somewhat unpredictable as the orders tended to be large and depended essentially upon the preferences of an architect or contractor. While Cambridge Quarrymen did not have any direct competition, the small amount of competition came from less expensive alternative building products. For example, the paving stones will cost the city $4.29 a square metre, whereas interlocking brick (an alternative, cement-based product) would cost $1 to $2 a square metre. The issue essentially involves how much more the market is willing to pay for a marble product than for a more common alternative. Given the common costs of the limestone block and the cutting, Green again wondered whether a price of $300 per tonne of paving stones and $500 per tonne of window sills would generate sufficient profits. As a rule of thumb, the company has historically attempted to attain a markup of 100 percent on the direct product costs. Typically, a markup of less than 70 percent was viewed as unprofitable. However, in a situation such as this, the measurement of the direct costs by product line are not straightforward. Furthermore, the unsold product, both finished and unfinished, had always presented a problem when costing the inventory for Cambridge Quarrymen’s annual financial report. Depending upon the approach adopted, the costing of the inventory could have a material effect on the net income. 

Required.

As Rick Green, would you bid on both of the orders? If so, at what price? Explain your reasoning.

Transcribed Image Text:

Limestone Block • Average 8 tonnes • Cost $50 per tonne Cut two sides from the limestone block • Loss of 1 tonne Cut into product blocks • Yield of 80% Window Sills Large Units Hearth Slabs Paving Stones • 10% • Cutting costs $12 per tonne • Processing costs of $75 per tonne • Yield of 70% • 40% • Cutting costs $15 per tonne • Processing costs of $180 per tonne • Yield of 48% • 10% • Cutting costs $14 per tonne • Processing costs of $115 per tonne • Yield of 50% • 40% • Cutting costs S10 per tonne • Processing costs of $150 per tonne • Yield of 65% • 21% of window sill waste into paving stones at a cost of $65 per tonne • Estimated selling price of $550 – S650 • Estimated selling price of $550 – $650 • Estimated selling price of $450 – $550 • Estimated selling of $250 – $300 per tonne per tonne per tonne per tonne