Mendel Paper Companyproduces four basicpaper product linesat one of itsplants: computer paper,napkins,place mats,and poster board.Materials and operationsvary according tothe line ofproduct. The markethas beenrelativelygood. The demandfor napkins andplace mats hasincreased with morepeople eating out,and thedemandfor the otherlines has beengrowing steadily.
The plant superintendent,Marlene Herbert, whilepleased with theprospects for increasedsales, isconcernedabout costs:
“We hear talkabout a paperlessoffice, but Ihaven’t seen ityet. The computers,if anything, haveincreased themarketfor paper. Ourbig problem nowis the highfixed cost ofproduction. As wehave automated ouroperation,we haveexperienced increases infixed overhead andeven variable overhead.And, we willhave to addmoreequipment sinceit appears thatwe need evenmore plant capacity.We are operatingover our normalcapacity asitis.
The place matmarket concerns me.We may have todiscontinue printing themats. Our specialtyprinting isdrivingup the variableoverhead to thepoint where wemay not find itprofitable to continuewith that lineat all.”
Cost and pricedata for thenext fiscal quarterare as follows:
|Estimated sales volumein units||30,000||120,000||45,000||80,000|
Variable overheadincludes the costof hourly laborand the variablecost of equipmentoperation. The fixedplantoverhead isestimated at $420,000for the quarter.Direct labor, toa large extent,is salaried; thecost is includedasa part offixed plant overhead.The superintendent’s concernabout the eventualneed for morecapacity isbasedon increases inproduction that mayreach and exceedthe practical capacityof 60,000 machinehours.
In addition tothe fixed plantoverhead, the plantincurs fixed sellingand administrative expensesper quarterof$118,000.
“I share yourconcern about increasingfixed costs,” thesupervisor of plantoperations replies. “Weare stilloperatingwith about thesame number ofpeople we hadwhen we didn’thave this sophisticatedequipment. Inreviewingour needs andcosts, it appearsto me that wecould cut fixedplant overhead to$378,000 aquarterwithout doing anyviolence to ouroperation. This wouldbe a bighelp.”
“You may beright,” Herbert responds.”We forget thatwe have moreproductive power thanwe once had,and wemay aswell take advantageof it. Supposewe get somehard figures thatshow where thecost reductions willbemade.”
Data with respectto production permachine hour andthe variable costper hour ofproducing each ofthe productsaregiven as follows:
|Units per hour||6||10||5||4|
|Variable overhead perhour||?$9.00||??$6.00||?$12.00||??$8.00|
“I hate tospoil things,” thevice-president of purchasingannounces. “But thecost of ourmaterials forcomputerstock is now upto $7. Just gota call aboutthat this morning.Also, place matmaterials will beup to $4aunit.”
“On the brightside,” the vice-presidentof sales reports,”we have firmorders for 35,000cartons ofcomputerpaper, not 30,000as we originallyfigured.”
From all original estimates given, prepare estimated contribution margins by product line for the next fiscal quarter. Also, show the contribution margins per unit.Prepare contribution margins as in part (1) with all revisions included.For the original estimates, compute each of the following:(a) Break-even point for the given sales mix.(b) Margin of safety for the estimated sales volume.For the revised estimates, compute each of the following:(a) Break-even point for the given sales mix.(b) Margin of safety for the estimated sales volume.Comment on Herbert’s concern about the variable cost of the place mats.