Case Scenario:
Moore Inc. invented a secret process to double the growth rate of hatchery trout and manufactures a variety of products related to this process. Each product is independent of the others and is treated as a separate division. Product managers have a great deal of freedom to manage their divisions as they think best. Failure to produce target division income is dealt with severely; however, rewards for exceeding one's profit objectives are as one division manager described them, lavish.
The target profit for Morey for the coming year is $800,000 (20% return on the investment in the annual fixed costs of the division) Moore selling price may not vary above the current selling price of $200 per gallon, but it may vary as much as 10% below $200 (i.e. $180). Other constraints on division operations are as follows:
Production cannot exceed sales, because Moore's corporate advertising stresses completely new additives each year, even though the "newness" of the models may be only cosmetic.
- Last year sales were 30,000 units at $200 per gallon
- Present capacity of Morey's manufacturing facility is 40,000gallons per year, but capacity can be increased to 80,000 gallons per year with an additional investment of $1 million per year in fixed costs.
- Present variable costs amount to $80 per unit, but if commitments are made for more than 60, 000 gallons, Morey's vendors are willing to offer raw material discounts amounting to $20 per gallon, beginning with 60.001.
Calculate:
1) The dollar value of Morey's current annual fixed costs.
2) Determine the number of gallons that Morey must sell @$200 per gallon to achieve the profit objective. Be sure to consider any relevant constraints. What if the selling price is $180?
3) Without prejudice to your previous answers, assume that Bryan Endreson decides to sell 40,000 gallons at $200 per gallon and 24,000 gallons at $180 per gallon. Prepare a pro forma income statement for Morey, showing where Endreson's decision will achieve Morey's profit objectives.