Our society is very dynamic, even more with rapid advances intechnology. Explain why the spread of formal organizations and thedevelopment of computer technology threaten us all with a loss ofprivacy.
Our society is very dynamic, even more with rapid advances intechnology. Explain why the spread of formal organizations and thedevelopment of computer technology threaten us all with a loss ofprivacy.
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CASE 2B â MENDEL PAPER COMPANY
Mendel Paper Company produces four basic paper product lines atone of its plants: computer paper, napkins, place mats, and posterboard. Materials and operations vary according to the line ofproduct. The market has been relatively good. The demand fornapkins and place mats has increased with more people eating out,and the demand for the other lines has been growing steadily.
The plant superintendent, Marlene Herbert, while pleased withthe prospects for increased sales, is concerned about costs:
"We hear talk about a paperless office, but I haven't seen ityet. The computers, if anything, have increased the market forpaper. Our big problem now is the high fixed cost of production. Aswe have automated our operation, we have experienced increases infixed overhead and even variable overhead. And, we will have to addmore equipment since it appears that we need even more plantcapacity. We are operating over our normal capacity as it is.
The place mat market concerns me. We may have to discontinueprinting the mats. Our specialty printing is driving up thevariable overhead to the point where we may not find it profitableto continue with that line at all."
Cost and price data for the next fiscal quarter are asfollows:
|
|
|
| |||||
| 30,000 | 120,000 | 45,000 | 80,000 | ||||
| 14.00 | 7.00 | 12.00 | 8.50 | ||||
| 6.00 | 4.50 | 3.60 | 2.50 |
Variable overhead includes the cost of hourly labor and thevariable cost of equipment operation. The fixed plant overhead isestimated at $420,000 for the quarter. Direct labor, to a largeextent, is salaried; the cost is included as a part of fixed plantoverhead. The superintendent's concern about the eventual need formore capacity is based on increases in production that may reachand exceed the practical capacity of 60,000 machine hours.
In addition to the fixed plant overhead, the plant incurs fixedselling and administrative expenses per quarter of $118,000.
"I share your concern about increasing fixed costs," thesupervisor of plant operations replies. "We are still operatingwith about the same number of people we had when we didn't havethis sophisticated equipment. In reviewing our needs and costs, itappears to me that we could cut fixed plant overhead to $378,000 aquarter without doing any violence to our operation. This would bea big help."
"You may be right," Herbert responds. "We forget that we havemore productive power than we once had, and we may as well takeadvantage of it. Suppose we get some hard figures that show wherethe cost reductions will be made."
Data with respect to production per machine hour and thevariable cost per hour of producing each of the products are givenas follows:
Computer Paper | Napkins | Place Mats | Poster Board | |
Units per hour | 6 | 10 | 5 | 4 |
Variable overhead per hour | 9.00 | 6.00 | 12.00 | 8.00 |
"I hate to spoil things," the vice-president of purchasingannounces. "But the cost of our materials for computer stock is nowup to $7. Just got a call about that this morning. Also, place matmaterials will be up to $4 a unit."
"On the bright side," the vice-president of sales reports, "wehave firm orders for 35,000 cartons of computer paper, not 30,000as we originally figured."
Questions:
1. From all original estimates given, prepare estimatedcontribution margins by product line for the next fiscal quarter.Also, show the contribution margins per unit.
2. Prepare contribution margins as in part (1) with allrevisions included.
3. For the original estimates, compute each of thefollowing:
a. Break-even point for the given sales mix.
b. Margin of safety for the estimated sales volume.
4. 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.
5. Comment on Herbert's concern about the variable cost of theplace mats.
