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Managerial Accounting




CASE 2B ? MENDEL PAPER COMPANY;Mendel Paper Company produces four basic paper product lines at one of its plants: computer;paper, napkins, place mats, and poster board. Materials and operations vary according to the line;of product. The market has been relatively good. The demand for napkins and place mats has;increased with more people eating out, and the demand for the other lines has been growing;steadily.;The plant superintendent, Marlene Herbert, while pleased with the prospects for increased sales;is concerned about costs;We hear talk about a paperless office, but I haven't seen it yet. The computers, if;anything, have increased the market for paper. Our big problem now is the high fixed;cost of production. As we have automated our operation, we have experienced increases;in fixed overhead and even variable overhead. And, we will have to add more equipment;since it appears that we need even more plant capacity. We are operating over our normal;capacity as it is.;The place mat market concerns me. We may have to discontinue printing the mats. Our;specialty printing is driving up the variable overhead to the point where we may not find;it profitable to continue with that line at all.;Cost and price data for the next fiscal quarter are as follows;Computer Paper Napkins Place mats Poster board;Estimated sales volume in units 30,000 120,000 45,000 80,000;Selling prices????????. $14.00 $7.00 $12.00 $8.50;Material costs???????. 6.00 4.50 3.60 2.50;Variable overhead includes the cost of hourly labor and the variable cost of equipment operation.;The fixed plant overhead is estimated at $420,000 for the quarter. Direct labor, to a large extent;is salaried, the cost is included as a part of fixed plant overhead. The superintendent's concern;about the eventual need for more capacity is based on increases in production that may reach and;exceed the practical capacity of 60,000 machine hours.;In addition to the fixed plant overhead, the plant incurs fixed selling and administrative expenses;per quarter of $118,000."I share your concern about increasing fixed costs," the supervisor of plant operations replies.;We are still operating with about the same number of people we had when we didn't have this;sophisticated equipment. In reviewing our needs and costs, it appears to me that we could cut;fixed plant overhead to $378,000 a quarter without doing any violence to our operation. This;would be a big help.;You may be right," Herbert responds. "We forget that we have more productive power than we;once had, and we may as well take advantage of it. Suppose we get some hard figures that show;where the cost reductions will be made.;Data with respect to production per machine hour and the variable cost per hour of producing;each of the products are given as follows;Computer Paper Napkins Place mats Poster board;Units per hour 6 10 5 4;Variable overhead per hour $9.00 $6.00 $12.00 $8.00;I hate to spoil things," the vice-president of purchasing announces. "But the cost of our;materials for computer stock is now up to $7. Just got a call about that this morning. Also, place;mat materials will be up to $4 a unit.;On the bright side," the vice-president of sales reports, "we have firm orders for 35,000 cartons;of computer paper, not 30,000 as we originally figured.;Questions;1. From all original estimates given, prepare estimated contribution margins by product line;for the next fiscal quarter. Also, show the contribution margins per unit.;2. Prepare contribution margins as in part (1) with all revisions included.;3. For the original estimates, compute each of the following;a. Break-even point for the given sales mix.;b. Margin of safety for the estimated sales volume.;4. For the revised estimates, compute each of the following;a. Break-even point for the given sales mix.;b. Margin of safety for the estimated sales volume.;5. Comment on Herbert's concern about the variable cost of the place mats.


Paper#79622 | Written in 18-Jul-2015

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