Question

Clean Pro manufactures multiple products with several manufacturing plants. The Shiny Plant is one of the plants which manufactures and distributes two household cleaning and polishing products: Regular and Heavy-Duty. The following forecasted financial results for Shiny Plant based on the production and sales of 100,000 cases of each product (Regular and Heavy Duty) in the first 6 months of 2020 are presented below:  

    Table 1 Shiny Plant Forecasted Results for Six Months Ending 30 June 2020

          

$(000)                $(000)                                 $(000)

Regular                Heavy Duty                      Total

Sales                                   $2,000                 $3,000                                $5,000

Cost of Sales                      (1,600)                (1,900)                 (3,500)

Gross Profit                      400                       1,100                                   1,500

Selling and Admin Costs

Variable                             (400)                   (700)                                   (1,100)

   Fixed                               (240)                    (360)                                   (600)

Net Profit/Loss                 ($240)                $40                                      ($200)

The fixed selling and administration costs are allocated between the two products based on the dollar value of sales.

The cost data for the two products are shown below:

Cost per case                                                  Regular                Heavy-Duty

Raw material                                                   $7                         $8

Direct labour                                                   4                            4

Variable manufacturing overhead                1                            2

Fixed manufacturing overhead                4                            5

Variable selling and admin costs                4                            7

Each product is manufactured on a separate production line and sales of each product are not mixed. Shiny Plant has set its annual normal manufacturing capacity at 200,000 cases of each product (100,000 units for each product per six-monthly period). The costs above are based on this normal capacity. However, the plant has a practical capacity of 250,000 cases of regular and 350,000 cases of heavy-duty product annually.

The following schedule reflects management’s views on the price and volume alternatives for the two products for the first six months of 2020. Management expects these to be unchanged for the next six months.

Table 2 Expected Sales Levels for Six Monthly Period

Regular                                                                                          Heavy-Duty

Price – per case               Sales – Volume                Price – per case               Sales – Volume

$18                                      120,000                              $25                                      175,000

20                                        100,000                              27                                        130,000

21                                        90,000                                30                                        100,000

22                                        80,000                                32                                        55,000

23                                        50,000                                35                                        35,000

Management believes the expected losses projected for the first 6 months of 2020 reflect a tight profit margin caused by intense competition and that many competitors will be forced out of the market by next year so the company profit should improve in long-term.

REQUIRED:

Write a report (1000 words) addressed to and advising the senior management of Clean Pro on the sustainability of continuous operation for Shiny Plant. In your report address the following with appropriate calculations to support your discussion:

1) Should Clean Pro close the Shiny Plant for the second 6 months of 2020 based on financial considerations only? In your analysis, you need to show the best profit if the plant remains operational (stays open) after taking into account the range of expected sales volumes provided in Table 2.

2) Identify a recommended price for both products assuming that the decision is to keep the Shiny Plant open.

3) Explain qualitative factors that would affect the decision to keep or drop the Shiny Plant.

4) Provide a summarised recommendation of whether to close the Shiny Plant or not for the next 6 months based on your analysis from 1) to 3). You need to fully explain and justify your recommendation considering all the factors including both financial (e.g. profitability and price) and qualitative factors (e.g., impact on the community).

A key focus is that you can clearly communicate your understanding, conclusions and recommendations to the management team.

Answer 1

First we calculate variable cost & solve part B for recommedation price & volume.

Variable cost per unit	Regular	Heavy - Duty
Raw Material	7	8
Direct Labour	4	4
variable Manufacturing Overhead	1	2
Variable selling & Aadmin Cost	4	7
Total	16	21

Part 1).

No, Shiny Plant will close as it gives incremental revenue calculted as under:

	Regular	Heavy duty	Total
Sales	1,760,000	3,000,000	4,760,000
Variable cost	1,280,000	2,100,000	3,380,000
Margin	480,000	900,000	1,380,000
Less: Fixed Manufacturing overhead	(400,000)	(500,000)	(900,000)
Profit for the Shiny Plant	80,000	400,000	480,000

It provides 480,000 additional revenue.

Note: Fixed Selling & Admin cost not taken. As it is allocable and not change even plant shud down.

Part 2)

Recommedation price: where total margin is maximum

Regular (total margin at each price level)
Expected units	Price	Variable cost	Margin per unit	Total Margin
120000	18	16	2	240,000
100000	20	16	4	400,000
90000	21	16	5	450,000
80000	22	16	6	480,000
50000	23	16	7	350,000
Heavy Duty (total margin at each price level)
Expected units	Price	Variable cost	Margin per unit	Total Margin
175000	25	21	4	700,000
130000	27	21	6	780,000
100000	30	21	9	900,000
55000	32	21	11	605,000
35000	35	21	14	490,000

For Regular 22 & Heavy duty 21

Part 3)

Qualititative Factors:

1. Impact on community

2. Impact on Employees

3. Impact on market shares of other produts

4. Impact on goodwill

Part 4).

We will recommed that Shiney plant not close as i will provide additional profit of $480,000 as calculated in part1.

Further, on qualitative ground also we will not recommed to shud down the plant. As continue operation of plant have crucial for company. If we drop the shiny plant then it will bad impact of company goodwill and harmful for other product market (as some cusomers wants to deal company having multiple operation and broad view). It has alos bad impact on surrounding community and employees working in plant.

So it is better to run the shiny plant.