Question

Ace Household Products Inc. is a multi-product company with several manufacturing plants. The Shareport Plant manufactures and distributes two household cleaning and polishing compounds, standard and commercial, under the Clean & Bright label. The forecasted operating results for the first six months of the current year, when 100,000 cases of each compound are expected to be manufactured and sold, are presented in the following statement.

CLEAN & BRIGHT COMPOUNDS - SHAREPORT PLANT
Forecasted Results of Operations
For the Six-Month Period Ending June 30
(In thousands)
	Standard	Commercial	Total
Sales	4,000	6,000	10,000
Cost of goods sold	3,200	3,800	7,000
Gross profit	800	2,200	3,000
Selling & administrative expenses:
Variable	800	1,400	2,200
Fixed	480	720	1,200
Total selling and administrative expenses	1,280	2,120	3,400
Income(loss) before taxes	(480)	80	(400)

The fixed selling and administrative expenses are allocated between the two products on the basis of peso sales volume.

The standard compound sold for P40 a case and the commercial compound sold for P60 a case during the first six months of the year. The manufacturing costs, by case of product, are presented in the schedule below. Each product is manufactured on a separate production line. Annual normal manufacturing capacity is 200,000 cases product. However, the plant is capable of producing 250,000 cases of standard compound and 350,000 cases of commercial compound annually.

	Cost per Case
	Standard	Commercial
Direct material	14.00	16.00
Direct labor	8.00	8.00
Variable manufacturing overhead	2.00	4.00
Fixed manufacturing overhead	8.00	10.00
Total manufacturing costs	32.00	38.00
Variable selling & admin costs	8.00	14.00

Depreciation charges are 50% of the fixed manufacturing overhead of each line.

The following schedule reflects the consensus of top management regarding the price-volume alternatives for the Clean & Bright products for the last six months of the current year. These are essentially the same alternatives management had during the first six months of the year.

Standard Compound			Commercial Compound
Alternative Prices	Sales Volume		Alternative Prices	Sales Volume
(per case)	(in cases)		(per case)	(in cases)
38.00	120,000		52.00	175,000
40.00	100,000		54.00	140,000
42.00	90,000		60.00	100,000
44.00	80,000		64.00	55,000
46.00	50,000		70.00	35,000

Ace household Products top management believes the loss for the first six months reflects a tight profit margin caused by intense competition. Management also believes that many companies will leave this market by next year and profit should improve.

Required:

1. What unit selling prices should management select for each of the Clean & bright compounds for the remaining six months of the year? Support your selection with appropriate calculations.

2. Independently of your answer to requirement (1), assume the optimum alternatives for the last six months were as follows: a selling price of P46 and volume of 50,000 cases for the standard compound and a selling price of P70 and volume of 35,000 cases for the commercial compound.

a. Should management consider closing down its operation until January 1 of the next year in order to minimize its losses? Support your answer with appropriate calculations.

b. Identify and discuss the qualitative factors that should be considered in deciding whether the Shareport Plant should be closed down during the last six months of the current year.

Answer 1

Solution:

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