Question
Gargantuan Industries is a multiproduct company with several manufacturing plants. The Boise Plant manufactures and distributes two household cleaning and polishing compounds, standard and commer-cial,
Gargantuan Industries is a multiproduct company with several manufacturing plants. The Boise Plant manufactures and distributes two household cleaning and polishing compounds, standard and commer-cial, under the Super Clean label. The forecasted operating results for the first six months of the current year, when 100,000 cases of each compound are expected to be manufactured and sold, are presented in the following statement. SUPER CLEAN COMPOUNDSBOISE PLANTForecasted Results of OperationsFor the Six-Month Period Ending June 30(in Thousands).
Sales
Standard Commercial Total
$2,000$3,000$5,000
Cost of goods sold
Standard Commercial Total
1,600 1,900 3,500
Gross profit
Standard Commercial Total
$ 400$1,100$1,500
Selling and administrative expenses: Variable
Standard Commercial Total
$400$700$1,100
Fixed*
Standard Commercial Total
240 360 600
Total selling and administrative expenses
Standard Commercial Total
$ 640$1,060$1,700
Income (loss) before taxes
Standard Commercial Total
$ (240)$ 40$ (200)
*The fixed selling and administrative expenses are allocated between the two products on the basis of dollar sales volume. The standard compound sold for $20 a case and the commercial compound sold for $30 a case during the first six months of the year. The manufacturing costs, by case of product, are presented in the schedule below. Each product is manufactured on a separate production line. Annual normal manufac-turing capacity is 200,000 cases of each product. However, the plant is capable of producing 250,000 cases of standard compound and 350,000 cases of commercial compound annually.
Cost per Case
Direct material
StandardCommercial
$ 7.00$ 8.00
Direct labor
StandardCommercial
4.004.00
Variable manufacturing overhead
StandardCommercial
1.002.00
Fixed manufacturing overhead*
StandardCommercial
4.005.00
Total manufacturing cost
StandardCommercial
.$16.00$19.00
Variable selling and administrative costs
StandardCommercial
$ 4.00$ 7.00
*Depreciation charges are 50 percent of the xed manufacturing overhead of each line.
The following schedule reflects the consensus of top management regarding the price-volume alternatives for the Super Clean products for the last six months of the current year. These are essentially the same alternatives management had during the first six months of the year.
Standard Compound (cases)Commercial Compound(cases)
Alt Prices--Sales VolAlt Prices--Sales Vol
$18 .... 120,000 ...................$25 ..........175,000
20 ....100,000 ...............27 .......140,000
21 ....... 90,000 ..............30 ........100,000
22 ....... 80,000 ....32 ....... 55,000
23 ........50,00035 ......35,000
Gargantuans top management believes the loss for the first six months reflects a tight profit margin caused by intense competition. Management also believes that many companies will leave this market by next year and profit should improve.
Required:
1.What unit selling price should Gargantuan Industries select for each of the Super Clean compounds for the remaining six months of the year? Support your selection with appropriate calculations.
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