Whirlwind Industries is a multiproduct company with several manufacturing plants. The Brownwood Plant manufactures and distributes two carpet cleaning products, Household and Commercial, under the Karpet Kleen label. The forecasted operating results for the first six months of the year are presented in the following statement

Karpet KleenBrownwood 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 & admin. expenses

Variable $ 400 $ 700 $1,100

Fixed 240 360 600

Total selling & admin expenses $ 640 $1,060 $1,700

Income (loss) before taxes $ (240) $ 40 $ (200)

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 fl ow 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 managements 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 fi rst six months of the year.

Household Commercial

Alternative Prices Unit Sales Alternative Prices (per unit) Unit Sales Volume

$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 50,000 35 35,000

Top management believes the companys loss for the fi rst six months of the year refl ects 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 profi ts should improve.

Other Information

Fixed manufacturing overhead per unit is based on normal manufacturing capacity.

Depreciation constitutes 50% of the fi xed manufacturing overhead cost of each product and is unavoidable.

The remaining fi xed 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.

Required

a. 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? Support your answers with calculations.

b. Based on the unit prices you have chosen in part (a), what is the companys expected income before taxes for the second six months of the year? Support your answer with an income statement prepared in the contribution margin format. Show the contribution margin and the segment margin for each product.

c. Based on the unit prices you have chosen in part (a), should the Household product be dropped for the second six months of the year? Support your answer.

d. Management has received a special order from CleanMe Corporation for 80,000 cases of the Commercial product at a price of $20 per case. No sales commission would need to be paid (sales commissions are normally $3.20 per case). Should they accept this order? Support your answer with calculations and comment on the qualitative considerations.

e. MakeIt Corporation has offered to make Karpet Kleens Household product for $13 per case. Karpet Kleen would still sell the product to its customers. The company could use its idle resources to make a new Extra Strength product. Management believes the company could sell 45,000 cases of this new product for $40 per case; variable selling and administrative expenses would be $7 per case. They expect that introducing this product will reduce current unit sales of the Commercial product by 10%. What is the maximum variable cost per unit of the Extra Strength product that would make this proposition worthwhile? Support your answer with calculations and comment on the qualitative considerations.

f. Without considering your answers to previous questions, assume that the optimum price/volume alternatives for the second six months of the year were a selling price of $23 and a volume of 50,000 cases for the Household product, and a selling price of $35 and volume of 35,000 cases for the Commercial product. What was the companys expected income before taxes? Prepare an income statement in contribution margin format.

g. Without considering your answers to previous questions, assume that the optimum price/volume alternatives for the second six months of the year were a selling price of $23 and a volume of 50,000 cases for the Household product, and a selling price of $35 and volume of 35,000 cases for the Commercial product. Should Whirlwind Industries consider closing down its operations to minimize its losses? Support your answer with appropriate calculations and discuss the qualitative factors that should be considered.

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