Industrial Solutions, Inc. Activity

Industrial Solutions, Inc., manufactures three types of containers a drum, a bin, and a box that are used in the chemical industry. The company uses a just-in-time production system for these containers. As a result, it holds no inventory.

Industrial Solutions, Inc.s accountants have provided detailed cost information for three containers (also in the accompanying spreadsheet).

	Drums	Bins	Boxes
Units produced and sold annually	5,000	4,500	3,000
Sales	$745,000	$495,000	$297,000
Variable costs:
Direct materials	255,500	85,500	72,000
Direct labor	18,000	40,500	36,000
Variable manufacturing overhead	6,750	9,000	18,750
Variable selling and administrative	3,750	13,500	11,250
Contribution margin	$461,000	$346,500	$159,000
Fixed costs:
Advertising, traceable	145,250	54,000	29,250
Depreciation on special equipment	40,000	33,750	39,000
Salaries of product-line managers	79,750	67,500	49,500
Allocated common fixed expenses*	45,000	90,000	62,250
Net operating income (loss)	$151,000	$101,250	$(21,000)
*Allocated based on sales dollars

Case 1 Add or Drop a Product Line

Management is concerned about the continued losses shown by the box containers and wants a recommendation as to whether the line should be discontinued. The special equipment used to produce the boxes can be sold immediately for its book value.

Required:

1. Indicate whether each item listed below is relevant or irrelevant in this situation.

	relevant	irrelevant
a. Sales revenue
b. Direct materials
c. Direct labor
d. Variable manufacturing overhead
e. Depreciation special equipment
f. Book value special equipment
g. Disposable value special equipment
h.Variable selling and administrative expense
i. Advertising expense
j. Salaries of product-line managers
k. Common fixed expenses

2. Should production and sale of the box containers be discontinued? Explain. Show computations to support your answer.

3. Recast the above data in a format that would be more usable to management in assessing the long-run profitability of the various product lines. (segment margin format Ch. 5.)

Case 2 Make or Buy

Harcor Industries has offered to sell drums to Industrial Solutions, Inc. for $75.00 per unit. Cost per unit to ship the drums from Harcor to Industrial Solutions would be $3.00. Assume that there will be no layoffs for any product-line managers unless a major recession. The special equipment used to produce the drums has a no resale value of and does not wear out.

Required:

1. Indicate whether each item listed below is relevant or irrelevant in this situation.

	relevant	irrelevant
a. Sales revenue
b. Direct materials
c. Direct labor
d. Variable manufacturing overhead
e. Depreciation special equipment
f. Book value special equipment
g. Disposable value special equipment
h. Variable selling and administrative expense
i. Advertising expense
j. Salaries of product-line managers
k. Common fixed expenses
l. Purchase price from supplier
m. Additional shipping costs

2. Should Industrial Solutions, Inc. outsource the drums? By what amount would its operating income change if the drums were outsourced?

3. What is the most that Industrial Solutions, Inc. should be willing to pay to outsource the drums? By how much would Harcor need to reduce their selling price to make outsourcing attractive to Industrial Solutions, Inc.?

4. Suppose that if the drums are purchased, Industrial Solutions, Inc., could use the freed capacity to manufacture the new container. The segment margin of the new container would be $125,500. Should Industrial Solutions accept this offer?

5. What are some qualitative concerns of accepting Harcors offer?