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Johnson Plastics: Abc is a $2 billion chemical co...

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Johnson Plastics: Abc is a $2 billion chemical company with a plastics plant located in Boulder, Colorado. The plastics plant of abc was started 30 years ago to produce a particular plastic film for snack food packages. The Durango plant is a profit center that markets its product to film producers. It is the only abc facility that produces this plastic. A few years ago, worldwide excess capacity for this plastic developed as a number of new plants were opened and some food companies began shifting to a more environmentally safe plastic that cannot be produced with the Boulder plant technology. Last year, with boulder plant utilization down to 60 percent, senior management of abc began investigating alternative uses of the boulder plant. The boulder plant's current 2008 annual operating statement is as follows: Revenue: $36 Variable Cost: (21) Fixed Cost - Plant admin: (17) Fixed Cost - Depreciation: (5) Net loss before taxes: (7) One alternative use of the boulder excess capacity is a new high-strength plastic used by the auto industry to reduce the weight of cars. Additional equipment required to produce the auto-motive plastic at the boulder plant can be leased for $3 million per year. Automotive plastic revenues are projected to be $28 million and variable costs are $11 million. Additional fixed costs for marketing, distribution and plant overhead attributable solely to auto plastics are expected to be $4 million. All of abcs divisions are evaluated on a before-tax basis. Required: a. Evaluate the auto industry plastic proposal. Compare the three alternatives: (i) close boulder, (ii) produce only film plastic at boulder, and (iii) produce both film and auto plastic at boulder. Which of the three do you suggest accepting? (If boulder is closed, additional one-time plant closing costs just offset the proceeds from selling the plant.) b. Suppose the boulder plant begins manufacturing both film and auto plastic. Prepare a performance report for the two divisions for the first year, assuming that the initial projections are realized and the film division's 2009 revenue and expense are the same as in 2008. Plant administration ($17 million) and depreciation ($5 million) are common costs to both the film and auto plastics divisions. For performance evaluation purposes, these costs are assigned to the two divisions based on sales revenue. All costs incurred for the Auto Plastics division should be charged to that division. c. Does the performance report in (b) reflect the relative performance of the two divisions? Why or why not? d. In the year 2010, the boulder plant is able to negotiate a $1 million reduction in property taxes. Property taxes are included in the "plant administration account". In addition, the Film Division is able to add $3 million in additional revenues (with $2.1 of additional variable costs) by selling film to European food packagers. Assuming that these are the only changes at the boulder plant between 2009 and 2010, how does the Auto Plastics Divisions performance change between these two years? Allocate the common costs using the method described in (b). e. Write a short memo evaluating the performance of the Auto Plastics Division in light of the events in the year 2010 and describing how these events affect the reported performance of the Auto Plastics Division.

 

Paper#7997 | Written in 18-Jul-2015

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