HRIP Company produces wallets from leather, fabric, and synthetic materials in a single production department. The basic
Question:
HRIP Company produces wallets from leather, fabric, and synthetic materials in a single production department. The basic product is a standard wallet made from leather and lined with fabric. HRIP has a good reputation in the market because the standard wallet is a high-quality item that has been produced for many years. Last year, the company decided to expand its product line and produce specialty wallets for special orders. These wallets differ from the standard in that they vary in size, contain both leather and synthetic materials, and are imprinted with the buyer's logo (the standard wallet is simply imprinted with the HRIP name in small letters). The decision to use some synthetic materials in the wallet was made to hold down the materials cost. To reduce the labor costs per unit, most of the cutting and stitching on the specialty wallets is done by automated machines, which are used to a much lesser degree in the production of the standard wallets. Because of these changes in the design and production of the specialty wallets, HRIP management believed that they would cost less to produce than the standard wallets. However, because they are specialty items, they were priced slightly higher; standards are priced at $30 and specialty wallets at $32.After reviewing last month's results of operations, HRIP's president became concerned about the profitability of the two product lines because the standard wallet showed a loss while the specialty wallet showed a greater profit margin than expected. The president is wondering whether the company should drop the standard wallet and focus entirely on specialty items. Units and cost data for last month's operations as reported to the president are as follows:
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