A company manufactures several products. You have the following data for three of these products:
D Style L Style P Style
Price per unit $ 3.80 $ 6.00 $ 7.50
Manufacturing cost per unit:
Direct materials $ 1.50 $ 1.75 $ 3.00
Direct labor 0.50 0.50 0.75
Overhead 1.00 1.00 1.50
Total $ 3.00 $ 3.25 $ 5.25
Direct marketing costs $ 75,000 $775,000 $150,000
Units sold 100,000 250,000 50,000
All three products are manufactured with other products in a large factory. A plantwide overhead rate of 200% of direct labor cost is used to assign overhead costs to products. Overhead costs in this factory at a direct labor cost of $500,000 a year are as follows:
Supervision $ 130,000
Indirect labor 120,000
Pension and payroll taxes 150,000
Indirect materials 180,000
Power 70,000
Heat and light 60,000
Depreciation 50,000
Taxes and insurance 160,000
Miscellaneous 80,000
Total $ 1,000,000
You have the following additional information:
1. Other products now use $200,000 a year in direct labor cost.
2. factory supervision costs will be $25,000 less if total direct labor costs falls below $300,000.
3. Indirect labor, indirect materials, and power costs are proportionately variable with direct labor cost.
4. Pensions and payroll taxes are calculated at 20% of total labor cost.
5. heat and light, depreciation, and taxes and insurance are wholly fixed.
6. Half of the miscellaneous overhead costs at normal volume are variable.
7. Marketing and administrative costs other than those directly traceable to individual product lines amount to $300,000. These costs would be the same even if none of these three products was marketed.
8. The direct marketing costs of P Style include $50,000 to amortize the costs incurred to develop this product initially. This cost will be completely amortized three years from now.
REQUIRED:
A. Based on the company’s method of product costing, which of these products appear profitable?
B. judging solely from the information provided in this problem, would you recommend that any of these three products be discontinued? Show your calculations.
C. If any product appeared to be unprofitable in your answer to (A) but worth continuing in your answer to (B), under what circumstances would you consider withdrawing it from the market?
