Question

Glad Bags produces restaurant storage containers. The company makes two sizes of containers: regular (55 gallon) and large (100 gallon). The company uses the same machinery to produce both sizes. The machinery can be run for only 2,500 hours per period. Glad can produce 20 regular containers every hour, whereas it can produce 8 large containers in the same amount of time. Fixed costs amount to $1,000,000 per period. Sales prices and variable costs are as follows:

Per Unit	Regular	Large
Sales price	$105	$225
Variable costs	28	42
Demand	30,000	20,000

Total investment $12,500,000

Required rate of return                                  10%

Consider each of the following INDEPENDENT scenarios:

1)      To maximize profits, how many of each size container should Glad produce? Prepare an income statement with this level of sales.

2)      Assume the company makes only the regular product. Glad is a price taker. The market price for the regular container recently dropped to $100 per container as there is a new low-cost online market entrant. Glad needs to earn the necessary income to satisfy its financial stakeholders. How much does Glad need to reduce costs to satisfy its required rate of return?

3)      Glad Products is deciding whether to outsource the production of a type of glue that is included in its containers. It currently costs Glad $.90 to make each bottle of glue in-house. If Glad Products outsources, it can buy the glue ready-made for $1.20 each and can shut down the production facilities it is currently using to manufacture the glue and save $10,000 a year in fixed costs. Glad currently allocates $50,000 in fixed costs to the glue. Annual requirement for the glue is 12,000 units. What is the effect of outsourcing?

Answer 1

1		REGULAR	LARGE
	SALE PRICE	105	225
	VARIABLE COST	28	42
	CONTRIBUTION	77	183
	NO OF UNITS PER HOURS	20	8
	CONTRIBUTION ON SCARE RESOURCES	1540	1464
	DEMAND	30000	8000
	NO OF HOURS REQUIRED	1500	1000
	REMAINING HOURS	1000	0
	INCOME STATEMENT AT OPTIMUM LEVEL
		REGULAR	LARGE	TOTAL
	SALES	3150000	1800000	4950000
	VARIABLE COST	840000	336000	1176000
	CONTRIBUTION	2310000	1464000	3774000
	REQUIRED RATE OF RETURN			1250000
	FIXED COST			1000000
	NET PROFIT			1524000

2		REGULAR
	SALE PRICE	100
	VARIABLE COST	28
	CONTRIBUTION	72
	NO OF UNITS PER HOURS	20
	CONTRIBUTION ON SCARE RESOURCES	1440
	DEMAND	30000
	NO OF HOURS REQUIRED	1500
	REMAINING HOURS	1000
		REGULAR
	SALES	3000000
	VARIABLE COST	840000
	CONTRIBUTION	2160000
	FIXED COST	1000000
	NET PROFIT	1160000
	REQUIRED RATE OF RETURN	1250000
	TOTAL COST NEED TO BE REDUCE	90000
	COST TO BE REDUCE PER UNIT	3

3	INCREASE IN COST DUE TO OUTSOURCING PER UNIT	0.3
	TOTAL NO UNITS REQUIRED	12000
	ADDITIONAL COST	3600
	SAVINGS FROM OPTING OUTSOURCING OPTION	10000
	FAVORABLE COST SAVING	6400
	BECAUSE OUTSOURCING OPTION YIELDING A FAVOURABLE
	RESULTS SHOULD GO FOR OUTSOURCING OPTION