(Comprehensive; product line) Clean N Brite is a multiproduct company with several manufacturing plants. The Cincinnati plant manufactures and distributes two household cleaning and polishing compounds, regular and heavy duty under the House Safe label. The forecasted operating results for the first six months of 2011, when 100,000 cases of each compound are expected to be manufactured and sold, are presented in the following statement:
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HOUSE SAFE COMPOUNDS—CINCINNATI PLANT |
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Forecasted Results of Operations |
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For the Six Month Period Ending June 30, 2011 |
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(in $000s) |
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Regular |
Heavy Duty |
Total |
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Sales |
$2,000 |
$ 3,000 |
$ 5,000 |
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Cost of sales |
(1,600) |
(1,900) |
(3,500) |
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Gross profit |
$ 400 |
$ 1,100 |
$ 1,500 |
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Selling and administrative expenses |
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|
|
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Variable |
$ 400 |
$700 |
$ 1,100 |
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Fixed |
240 |
360 |
600 |
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Total selling and administrative expenses |
$ (640) |
$(1,060) |
$ (1,700) |
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Income (loss) before taxes |
$ (240) |
$ 40 |
$ (200) |
The sales price per case for the regular compound will be $20 and for the heavy duty will be $30 during the first six months of 2011. The manufacturing costs by case of product follow.
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COST PER CASE |
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Regular |
Heavy Duty |
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Raw material |
$ 7.00 |
$ 8.00 |
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Direct labor |
4.00 |
4.00 |
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Variable manufacturing overhead |
1.00 |
2.00 |
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Fixed manufacturing overhead* |
4.00 |
5.00 |
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|
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Total manufacturing cost |
$16.00 |
$19.00 |
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Variable selling and administrative costs |
$ 4.00 |
$ 7.00 |
Each product is manufactured on a separate production line. Annual normal manufacturing capacity is 200,000 cases of each product. However, the plant is capable of producing 250,000 cases of regular compound and 350,000 cases of heavy duty compound annually.
The following schedule reflects top management consensus regarding the price/volume alternatives for the House Safe products for the last six months of 2011, which are essentially the same as those during its first six months.
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REGULAR COMPOUND |
HEAVY DUTY COMPOUND |
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Alternative |
Sales Volume |
Alternative Prices |
Sales Volume |
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Prices (per case) |
(in cases) |
(per case) |
(in cases) |
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$18 |
120,000 |
$25 |
175,000 |
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20 |
100,000 |
27 |
140,000 |
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21 |
90,000 |
30 |
100,000 |
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22 |
80,000 |
32 |
55,000 |
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23 |
50,000 |
35 |
35,000 |
Top management believes the expected loss for the first six months reflects a tight profit margin caused by intense competition and that many competitors will be forced out of this market by next year, so the company’s profits should improve.
a. What unit selling price should Clean N Brite select for each House Safe com pound for the remaining six months of 2011? Support your answer with appropriate calculations.
b. Without prejudice to your answer for requirement (a), assume that the optimum price/volume alternatives for the last six months will be a selling price of $23 and volume level of 50,000 cases for the regular compound and a selling price of $35 and volume of 35,000 cases for the heavy duty compound.
1. Should Clean N Brite consider closing its Cincinnati operations until 2012 to minimize its losses? Support your answer with appropriate calculations.
2. Identify and discuss the qualitative factors that should be considered in deciding whether the Cincinnati plant should be closed during the last six months of 2011.