Question

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 objective are, as one division manager described them, lavish.
The Morey Division sells an additive that is added to pond water. Morey has had a new manager in each of the three previous years because each manager failed to reach Moore’s target profit. Bryan Endreson has just been promoted to manager and is studying ways to meet the current target profit for Morey.
The target profit for Morey for the coming year is $800,000 (20 percent return on the investment in the annual fixed costs of the division). 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.
• The Morey selling price may not vary above the current selling price of $200 per gallon, but it may vary as much as 10 percent below $200 (i.e., $180).
Endreson is now examining data gathered by his staff to determine whether Morey can achieve its target profit of $800,000. The data are:
• Last year’s sales were 30,000 units at $200 per gallon.
• The present capacity of Morey’s manufacturing facility is 40,000 gallons 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 gallon 60,001.
Endreson believes that these projections are reliable, and he is now trying to determine what Morey must do to meet the profit objectives assigned by Moore’s board of directors.

Required
A. Calculate the dollar value of Morey’s current annual fixed costs.
B. Determine the number of gallons that Morey must sell at $200 per gallon to achieve the profit objective. Be sure to consider any relevant constraints. What if the selling price is $180?
C. 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 whether Endreson’s decision will achieve Morey’s profit objectives.



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  • CreatedMarch 11, 2015
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