Handy Household Products, Inc., is a multiproduct company with several manufacturing plants. The Shreveport Plant manufactures and distributes two household cleaning and polishing compounds, standard and commercial, under the Clean & Bright label. The forecasted operating results for the first six months of the current year, when 150,000 cases of each compound are expected to be manufactured and sold, are presented in the following statement.

CLEAN & BRIGHT COMPOUNDSSHREVEPORT PLANT Forecasted Results of Operations For the Six-Month Period Ending June 30 (in thousands)

Standard

Commercial

Total

Sales

$

7,500

$

12,000

$

19,500

Cost of goods sold

6,300

7,950

14,250

Gross profit

$

1,200

$

4,050

$

5,250

Selling and administrative expenses:

Variable

$

1,500

$

2,400

$

3,900

Fixed*

846

1,354

2,200

Total selling and administrative expenses

$

2,346

$

3,754

$

6,100

Income (loss) before taxes

$

(1,146

)

$

296

$

(850

)

*The fixed selling and administrative expenses are allocated between the two products on the basis of dollar sales volume.

The standard compound sold for $50 a case and the commercial compound sold for $80 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 manufacturing capacity is 300,000 cases of each product. However, the plant is capable of producing 350,000 cases of standard compound and 450,000 cases of commercial compound annually.

Cost per Case

Standard

Commercial

Direct material

$

19.00

$

21.00

Direct labor

10.00

12.00

Variable manufacturing overhead

3.00

6.00

Fixed manufacturing overhead*

10.00

14.00

Total manufacturing cost

$

42.00

$

53.00

Variable selling and administrative costs

$

10.00

$

16.00

Depreciation charges are 50 percent of the fixed manufacturing overhead of each line.

The following schedule reflects the consensus of top management regarding the price-volume alternatives for the Clean & Bright 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

Commercial Compound

Alternative Prices (per case)

Sales Volume (in cases)

Alternative Prices (per case)

Sales Volume (in cases)

$

48

130,000

$

62

185,000

50

110,000

64

150,000

52

100,000

70

110,000

54

90,000

74

65,000

56

60,000

80

45,000

Handy Household Products 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 management select for each of the Clean & Bright compounds for the remaining six months of the year?

2

Assume the optimum alternatives for the last six months were as follows: a selling price of $56 and volume of 60,000 cases for the standard compound, and a selling price of $80 and volume of 45,000 cases for the commercial compound. Calculate the contribution margin

2-b.	Should Gargantuan Industries consider closing down its operations until January 1 of the next year in order to minimize its losses?