A soft drink company has three bottling plants thoughout the country. Bottling o

Question

A soft drink company has three bottling plants thoughout the country. Bottling occurs at the regional level because of the high cost of transporting bottled soft drinks. The parent company supplies each plant with the syrup. The bottling plants combine the syrup with carbonated soda to make and bottle the soft drinks. The bottled soft drinks are then sent to regional grocery stores.The bottling plants are treated as cost centers. The managers of the bottling plants are evaluated based on minimizing the cost per soft drink bottled and delivered. Each bottling plant uses the same equipment, but some produce more bottles of soft drinks because of different demand. The costs and output for each bottling plant are:

                   Units produced                   Variable costs                   Fixed costs

Plant A:        10,000,000 units                      $200,000                     $1,000,000

Plant B:         20,000,000 units                     $450,000                      $1,000,000

Plant C:         30,000,000 units                     $650,000                      $1,000,000

a. Estimate the average cost per unit for each plant.

b. Why would the manager of Plant A be unhappy with using the average cost as the performance measure?
c. What is an alternative performance measure that would make the manager of plant A happier?
d. Under what circumstances might the average cost be a better performance measure?

Explanation / Answer

a. Estimate the average cost per unit for each plant. Plant A: $0.12 Plant B: $0.0725 Plant C: $0.055 b. Why would the manager of Plant A be unhappy with using the average cost as the performance measure? Manager of Plant A will be unhappy with using average cost as performance measure, because he has no control over FIXED COST. The variable cost of is lowest in case of Plant A, as details given below: Variable Cost Plant A: $0.02 Plant B: $0.0225 Plant C: $0.0217 c. What is an alternative performance measure that would make the manager of plant A happier? The alternative performance indicator should be variable cost, which is lowest in case of Plant A Variable Cost Plant A: $0.02 Plant B: $0.0225 Plant C: $0.0217 d. Under what circumstances might the average cost be a better performance measure? Average cost be a better performance indicator, when evaluating the total cost and sales ratios, and a decision is required to continue a plant.

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