Gargantuan Industries is a multiproduct company with several manufacturing plants. The Boise Plant

manufactures and distributes two household cleaning and polishing compounds, standard and commercial,

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 PLANT

Forecasted Results of Operations

For the Six-Month Period Ending June 30

(in Thousands)

Standard Commercial Total

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

Cost of goods sold ............................................................................. 1,600 1,900 3,500

Gross profit ........................................................................................ $ 400 $1,100 $1,500

Selling and administrative expenses:

Variable ......................................................................................... $ 400 $ 700 $1,100

Fixed* ............................................................................................ 240 360 600

Total selling and administrative expenses ........................................ $ 640 $1,060 $1,700

Income (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 manufacturing

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 Case

Standard Commercial

Direct material ..................................................................................................... $ 7.00 $ 8.00

Direct labor .......................................................................................................... 4.00 4.00

Variable manufacturing overhead .......................................................................... 1.00 2.00

Fixed manufacturing overhead* ............................................................................. 4.00 5.00

Total manufacturing cost ...................................................................................... $16.00 $19.00

Variable selling and administrative costs ................................................................ $ 4.00 $ 7.00

*Depreciation charges are 50 percent of the fi 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.

Standard Compound Commercial Compound

 

Alternative 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.