Gargantuan Industries is a multiproduct company with several manufacturing plants. The Boise… 1 answer below »

Gargantuan Industries is a multiproduct company with several manufacturing plants. The Boise Plant manufactures and distributes two household cleaning and polishing compounds, standard and commer-cial, under the Super Clean 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. SUPER CLEAN COMPOUNDS—BOISE PLANTForecasted Results of OperationsFor the Six-Month Period Ending June 30(in Thousands)StandardCommercialTotalSales …………………………………………………………………………………….$2,000$3,000$5,000Cost of goods sold ………………………………………………………………….. 1,600 1,900 3,500Gross profit …………………………………………………………………………….$ 400$1,100$1,500Selling and administrative expenses: Variable ……………………………………………………………………………..$ 400$ 700$1,100 Fixed* ……………………………………………………………………………….. 240 360 600 Total selling and administrative expenses ………………………………….$ 640$1,060$1,700Income (loss) before taxes …………………………………………………………$ (240)$ 40$ (200)*The fixed selling and administrative expenses are allocated between the two products on the basis of dollar sales volume. The standard compound sold for $20 a case and the commercial compound sold for $30 a case during the first six months of the year. The manufacturing costs, by case of product, are presented in the schedule below. Each product is manufactured on a separate production line. Annual normal manufac-turing capacity is 200,000 cases of each product. However, the plant is capable of producing 250,000 cases of standard compound and 350,000 cases of commercial compound annually. Cost per CaseStandardCommercialDirect material ………………………………………………………………………………………..$ 7.00$ 8.00Direct labor …………………………………………………………………………………………….4.004.00Variable manufacturing overhead ………………………………………………………………..1.002.00Fixed manufacturing overhead* ………………………………………………………………….. 4.00 5.00Total manufacturing cost …………………………………………………………………………..$16.00$19.00Variable selling and administrative costs ……………………………………………………….$ 4.00$ 7.00*Depreciation charges are 50 percent of the ? xed manufacturing overhead of each line. The following schedule reflects the consensus of top management regarding the price-volume alternatives for the Super Clean 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. ¦ Case 15–48 Pricing in a Tight Market; Possible Plant Closing (LO 1, 10) 2(a). Contribution margin, Standard: $350 Cases hiL10912_ch15_642-683.indd 6807/26/10 12:52 PM Chapter 15 Target Costing and Cost Analysis for Pricing Decisions 681Standard CompoundCommercial CompoundAlternative Prices(per case)Sales Volume(in cases)Alternative Prices(per case)Sales Volume(in cases) $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 Gargantuan’s 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 price should Gargantuan Industries select for each of the Super Clean 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 $23 and volume of 50,000 cases for the standard compound, and a selling price of $35 and volume of 35,000 cases for the commercial compound. a. Should Gargantuan Industries consider closing down its operations 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 Boise Plant should be closed down during the last six months of the current year.

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