Catawba
CATAWBA INDUSTRIAL COMPANY 1. Is the company correct in its practice of not manufacturing standard model compressors on Sundays because of the accounting loss incurred on each unit?
As per the cost structure given in the case, Selling costs, Sales and Administration costs, Depreciation and other manufacturing overheads have been considered to be variable costs, i.e. per unit costs and hence have been accounted for in the calculation of profit and loss. As such, this methodology is resulting in a loss of $900 for every Sunday that the plant is operated. Therefore, if the present cost structure is used no production should be done on Sunday since it is clearly unprofitable.
However, on a closer analysis, a few irrelevant costs like Selling expenses and General and Administration costs can be excluded, since they do not vary by the volume of production. Hence, even if the plant operates on a Sunday no incremental costs will be incurred for these particular items.
Per unit costs and profit analysis for operations on Sunday: | Sunday | Price | 10,000 | | | Direct labor | 4,000 | Materials | 3,244 | Other Direct charges | 156 | Depreciation | 497 | Other Mfg overheads | 177 | | | COGS | 8,074 | | | Sales | 0 | General & Admin | 0 | | | Total Cost | 8,074 | | | Profit per unit | 1,926 | Return on Sales | 19.26% |
Total Profit = 4*1,926 = $7,704.
Therefore, the company can operate on a Sunday since it is profitable and the company can significantly improve its operating income by $7,704. 2. If McPhee decides to manufacture ten light weight compressors each week and sell them at a price of $8,000, how much better or worse off financially would Catawba be?
The constraint in this case for the division between the production of light weight compressors and standard compressors being labor-hours, the division between the two will be as follows: Product | No of labor hours required per unit | No of
As per the cost structure given in the case, Selling costs, Sales and Administration costs, Depreciation and other manufacturing overheads have been considered to be variable costs, i.e. per unit costs and hence have been accounted for in the calculation of profit and loss. As such, this methodology is resulting in a loss of $900 for every Sunday that the plant is operated. Therefore, if the present cost structure is used no production should be done on Sunday since it is clearly unprofitable.
However, on a closer analysis, a few irrelevant costs like Selling expenses and General and Administration costs can be excluded, since they do not vary by the volume of production. Hence, even if the plant operates on a Sunday no incremental costs will be incurred for these particular items.
Per unit costs and profit analysis for operations on Sunday: | Sunday | Price | 10,000 | | | Direct labor | 4,000 | Materials | 3,244 | Other Direct charges | 156 | Depreciation | 497 | Other Mfg overheads | 177 | | | COGS | 8,074 | | | Sales | 0 | General & Admin | 0 | | | Total Cost | 8,074 | | | Profit per unit | 1,926 | Return on Sales | 19.26% |
Total Profit = 4*1,926 = $7,704.
Therefore, the company can operate on a Sunday since it is profitable and the company can significantly improve its operating income by $7,704. 2. If McPhee decides to manufacture ten light weight compressors each week and sell them at a price of $8,000, how much better or worse off financially would Catawba be?
The constraint in this case for the division between the production of light weight compressors and standard compressors being labor-hours, the division between the two will be as follows: Product | No of labor hours required per unit | No of