Managerial Decision Case

COST-VOLUME-PROFIT ANALYSIS

Junnie Castro , the marketing manager for a division that produces a variety of paper products, was considering the divisional manager's request for a sales forecast for a new product line of paper napkins. The divisional manager was gathering data so that he could choose between two different production processes. The first process would have a variable cost of P10 per case produced and fixed costs of P100,000. The second process would have a variable cost of P6 per case and fixed costs of P200,000. The selling price would be P30 per case. Jane had just completed a marketing analysis that projected annual sales of 30,000 cases.

Junnie was reluctant to report the 30,000 cases forecast to the divisional manager. She knew that the first process was labor-intensive, whereas the second was largely automated with little labor and no requirement for an additional production supervisor. If the first process were chosen, Stepha Lyn, a good friend, would be appointed as the line supervisor. If the second process were chosen, Stepha and an entire line of laborers would be laid off. After some consideration, Junnie revised the projected sales downward to 22,000 cases.

She believed that the revision downward justified. Since it would lead the divisional manager to choose the manual system, it showed a sensitivity to the needs of current employees-a sensitivity that she was afraid her divisional manager did not possess. He was too focused on quantitative factors in his decision making and usually ignored the qualitative aspects.

Required:

a. Compute the break-even point for each process.

b. Compute the sales volume for which the two process are equally profitable. Identify the range of sales for which the manual process is more profitable than the automated process. Identify the range of sales for which the automated process is more profitable than the manual process. Why did the divisional manager want the sales forecast?

c. Discuss Junnie's decision to alter the sales forecast. Do you agree with it? Did she act ethically? Was her decision justified since it helped a number of employees retain their employment? Should the impact on employees be factored into decisions? In fact, is it unethical not to consider the impact of decisions on employees?

d. Even though Frankie is not a management accountant, do of the ethical standards for management accountants apply? Explain.