Blue Skies Inc. is a retail gardening company that is piloting a new strategic initiative aimed at increasing gross profit. Currently, the company’s gross profit is 25% of sales, and its target gross profit percentage is 30%. The company’s current monthly sales revenue is $600,000.

The new initiative being piloted is to produce goods in-house instead of buying them from wholesale suppliers. Its in-house production process has two procedures. The makeup of the costs of production for Procedure 1 is 40% direct labor, 45% direct materials, and 15% overhead. The makeup of the costs of production for Procedure 2 is 60% direct labor, 30% direct materials, and 10% overhead. Assume that Procedure 1 costs twice as much as Procedure 2.

Instructions

1. Determine what the cost of labor, materials, and overhead for both Procedures 1 and 2 would need to be for the company to meet its target gross profit.

2. The company’s actual labor cost is $114,000 for Procedure 1. Determine the actual cost of direct labor, direct materials, and overhead for each procedure, and the total cost of production for each procedure.

3. The company is planning a CSR initiative to recycle the indirect materials used in production during Procedure 1. The company is paid for any of the indirect materials it recycles, and it applies the income from these payments as a direct offset to the cost of the direct materials. These indirect materials normally make up 70% of the overhead cost for Procedure 1. Determine what the maximum new cost (net of recycling revenues) of these indirect materials could be for Procedure 1 if this CSR initiative were to enable the company to meet its target gross profit percentage without changing any other costs.