Posted: April 17th, 2016

What unit selling price should Gargantuan Industries select for each of the Super Clean compounds for the remaining six months of the year?

Cost Per Case
Standard Commercial
Direct Material $7.00 $8.00
Direct Labor $4.00 $4.00
Variable manufacturing Overhead $1.00 $2.00
Fixed manufacturing Overhead* $4.00 $5.00
Total Manufacturing Cost $16.00 $19.00
Variable Selling and Administrative Costs $4.00 $7.00

*Depreciation charges are 50 percent of the fixed manufacturing overhead of each line.

The following schedule reflects the consensus of top management regarding the price-volume alternatives for the Super Clean products for the last six months of the current year. These are essentially the same alternatives management had during the first six months of the year.

Standard Compound Commercial Compound
Alternative Prices (per case) Sales Volume(in cases) Alternative Prices (per case) Sales Volume(in cases)
$18.00 120,000.00 $25.00 175,000.00
$20.00 100,000.00 $27.00 140,000.00
$21.00 90,000.00 $30.00 100,000.00
$22.00 80,000.00 $32.00 55,000.00
$23.00 50,000.00 $35.00 35,000.00

Gargantuan’s top management believes the loss for the first six months reflects a tight profit margin caused by intense competition. Management also believes that many companies will leave this market by next year and profit should improve.

Required:
1. What unit selling price should Gargantuan Industries select for each of the Super Clean compounds for the remaining six months of the year? Support your selection with appropriate calculations.

2. Independently of your answer to requirement (1), assume the optimum alternatives for the last six months were as follows: a selling price of $23 and volume of 50,000 cases for the standard compound, and a selling price of $35 and volume of 35,000 cases for the commercial compound.

a. Should Gargantuan Industries consider closing down its operations until January 1 of the next year in order to minimize its losses? Support your answer with appropriate calculations.

b. Identify and discuss the qualitative factors that should be considered in deciding whether the Boise Plant should be closed down during the last six months of the current year.