Louisville Jar Co. has processing plants in Kentucky and Pennsylvania. Both plan
ID: 2764384 • 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 A: Expand Kentucky's operations from its budgeted 11,000,000 units to a budgeted 17,000,000 units. It is believed that this can be accomplished by increasing Kentucky's fixed regional promotional expenditures by $120,000.
PLAN B: Close the Kentucky plant and expand the Pennsylvania operations from the current budgeted 20,000,000 to 31,000,000 units to fill Kentucky's budgeted production of 11,000,000 units. The Kentucky region would continue to incur promotional costs to sell the 11,000,000 units. All sales and costs would be budgeted by the Pennsylvania plant.
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.
12. What is the unit contribution margin for the Pennsylvania Plant? (carry out to four decimal places)
$__.__ __ __ __ per unit
13. What is the contribution margin ratio for the Pennsylvania Plant?
__ __. __% (carry to one decimal place, do not include the percent sign in your answer).
18. What is Louisville Jar Co's total operating income (loss) assuming they adopt Plan B? If a loss, include a negative sign before the number.
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)
Explanation / Answer
Kentucky Pennsylvania Total SP per unit(10/100) 0.1 0.1 Sales $1,100 $2,000 $3,100 Units sold(sales/SP) 11000 20000 Variable production costs Direct material 275 500 775 Direct labor 330 500 830 Factory overhead 220 350 570 Total variable cost 825 1350 VC per unit 0.075 0.0675 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) 12) unit contribution= SP-VC per unit 0.025 0.0325 13) contribution margin ratio(unit cont/SP) 25.00% 32.50% 14) contribution margin 275 650 15) Total cost 350 450 800
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