Question

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

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)
Sales $2,000 $3,000 $5,000
Cost of goods sold $2000 $3000 $5000
Gross Profit 1600 1900 3500
Selling and administrative expenses: Variable $400 $1100 $1500
Selling and administrative expenses: Fixed 240 360 600
Total selling and administrative expenses 640 260 1700
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.

$7.00 $8.00
4.00 4.00
1.00 2.00
4.00 5.00
$16.00

$19.00
$4.00 $7.00

Depreciation charges are 50 percent of the fixed 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

Alternative prices (per case)

 Sales volume (in cases)
$18 120,000
20 100,000
21 90,000
22 80,000
23 50,000

Commercial Compound

Alternative prices (per case) Sales volume (in cases)
$25 175,000
27 140,000
30 100,000
32 55,000
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:

2-a. 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. Calculate the contribution margin.

2-b. Given the scenario in requirement (2-a), should management consider closing down its operations until January 1 of the next year in order to minimize its losses?

GARGANTUAN INDUSTRIES

BOISE PLANT

Projected Contribution Margin

For the Six-Month Period Ending December 31

(in thousands)

Standard Commercial Total
Sales ? ? ?
Variable costs:
Selling and administrative ? ? ?
Manufacturing ? ? ?
Total variable costs
Contribution margin ? ? ?

Please provide answers for ALL boxes that has a "?". Thanks!

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