Louisville Jar Co. has processing plants in Kentucky and Pennsylvania. Both plan
ID: 2584098 • Letter: L
Question
Louisville Jar Co. has processing plants in Kentucky and Pennsylvania. Both plants use recycled glass to produce jars that a variety of food processors use in food canning. The jars sell for $10 per hundred units. Budgeted revenues and costs for the year ending December 31, 2014, in thousands of dollars, are:
Kentucky
Pennsylvania
Total
Sales
$1,100
$2,000
$3,100
Variable production costs
Direct material
275
500
775
Direct labor
330
500
830
Factory overhead
220
350
570
Fixed factory overhead
350
450
800
Fixed regional promotional costs
50
50
100
Allocated home office costs
55
100
155
Total costs
1280
1950
3230
Operating income (loss) before tax
($180)
$50
($130)
Home office costs are fixed and are allocated to manufacturing plants on the basis of relative sales levels. Fixed regional promotional costs are discretionary advertising costs needed to obtain budgeted sales levels.
Because of the budgeted operating loss, Louisville Jar Co. is considering ceasing operations at its Kentucky plant. If it does so, proceeds from the sale of plant assets will exceed asset book values and exactly cover all termination costs; fixed factory overhead costs of $25,000 would not be eliminated. Louisville Jar Co. is considering the following three alternative plans:
PLAN C: Close the Kentucky plant and enter into a long-term contract with a competitor to serve the Kentucky region's customers. This competitor would pay a royalty of $1.25 per 100 units sold to Louisville, which would continue to incur fixed regional promotional costs to maintain sales of 11,000,000 units in the Kentucky region.
Answer the following regarding Plan C
20. What is the amount of royalties Louisville Jar Co's will receive if they choose Plan C?
21. Including the royalties, what is the total contribution margin for Louisville Jar Co's?
22. What are Louisville Jar Co's total fixed costs if they choose plan C?
23. What is Louisville Jar Co's total operating income (loss) assuming they adopt Plan C? If a loss, include a negative sign before the number.
24. What is the overall impact to Louisville Jar Co's operating income if they implement Plan C. If it decreases operating income, include a negative sign before the number.
Explanation / Answer
20. Jars sold 11,000,000 units
Royalty Received by Louisville Jar Co.
= 11,000,000 * $1.25 / 100
$ 137,500
21. The total contribution margin for Louisville Jar Co. is $ 137,500 (Assuming the plant is closed)
22. Total Fixed Costs on choosing Plan C = Fixed cost of the factory + Fixed Promotional Expenses
= 25,000 + 50,000
= $75,000
23. Total Operating Income = Contribution - fixed Expense
= 137,500 - 75,000
= $62,500
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