Karpet Kleen-Brownwood Plant Forecasted Result of Operations For the six months ended June 30 (in thousands) Household Commercial Total Units 100 100 200 Sales revenue $2,000 $3.000 $5,000 Cost of goods sold 1,600 1.900 3.500 Gross profit $400 $1,100 $1.500 Selling & administrative expenses Variable $300 $700 $1,100 Fixed 240 360 600 $540 $1,060 $1,600 Total selling & administrative expenses Income (loss) before taxes $(140) $40 $(100) - Fixed selling & administrative expenses are allocated between the two products on the basis of relative sales dollars. These expenses are avoidable only if the entire plant is closed. The product costs per unit are as follows: Household Commercial Direct materials $7 $8 Direct labor 4 4 Variable manufacturing overhead 1 2 Fixed manufacturing overhead 4 5 Total product cost $16 $19 Each product is manufactured on a separate production line. Normal manufacturing capacity is 200,000 cases of each product per year. However, the plant is capable of producing 250.000 cases of the Household product and 350,000 cases of the Commercial product per year. Capacity levels assume an even flow of production throughout the year, so that the maximum capacity for the second half of the year is 125.000 cases of Household and 175.000 of Commercial cases. The following schedule reflects the top management's consensus regarding the price/volume alternatives for Karpet Kleen products in the second six months of the year. These are essentially the same alternatives management faced during the first six months of the year. Commercial Household Alternative Prices Unit Sales (per Unit) Volume Alternative Prices (per Unit) Unit Sales Volume $18 120,000 $25 175.000 19 100,000 27 140.000 20 90.000 29 100.000 21 80,000 30 55.000 22 50,000 31 35.000 Top management believes the company's loss for the first six months of the year reflects a tight profit margin caused by intense competition. Management also believes that many companies will be forced out of this market by the next year and that long-term profits should improve. Other Information Fixed manufacturing overhead per unit is based on normal manufacturing capacity. Depreciation constitutes 50% of the fixed manufacturing overhead cost of each product and is unavoidable . The remaining fixed manufacturing overhead expenses arise from factory personnel assigned to particular products. Variable selling and administrative expenses are $4 and $7 per unit, respectively, for the Household and Commercial products. . Your Answer Correct Answer (Used) What unit selling price should Whirlwind Industries assign to each of the Karpet Kleen products to maximize net income for the second six months of the year? Selling Prices Maximum Net Income Household: $ 21 80,000 Commercial: 5 27 140,000 (b) Based on the unit prices you have chosen in part (a), what is the company's expected income before taxes for the second six months of the year? (Enter negative amounts using either a negative sign preceding the number e.g. -45.) Company's expected income before taxes $ Support your answer with an income statement prepared in the contribution margin format. Show the contribution margin and the segment margin for each product. Household Commercial Total $ $ $ $ $ $ $
