Maria Jones has just earned a university degree in management. She has taken the position of assistant to the president at Roseville Engineering, which manufacturers tungsten carbide drill steels for the gold-mining industry.

Roseville Engineering manufacturers two types of drill steels. One has a steel rod of 3/4-inch diameter and the other a diameter of 1 inch. The manufacturing takes place in three departments. In the tip-fabricating department, tungsten carbide tips are manufactured from powered wolfram. In the steel-forging department, the steel rods are slotted and prepared for the insertion of the tips. The assembly department puts the tips and steel rods together in a brazing process.

Each department has two severe general capacity limits. The first constraint prohibits further capital expenditure because of a very weak liquid position arising from past losses: the second is the local labor situation, which makes the hiring of more labor, or using overtime, virtually impossible. The capacity of each department is as follows:

Tip fabricating (Dept. A)	200,000 hours
Steel forging (Dept. B)	275,000 hours
Assembly (Dept. C)	350,000 hours

The treasurer has just completed the budget for the forthcoming year. Because of the renewed confidence in gold, the company is expected to operate at full capacity.

The treasurer has produced the following profit analysis of the two products, on which a major production decision was based:

	3/4j-lnch	1-inch
Selling price	$60.00	$70.00
Flexible Costs
Tungsten carbide	2.00	3.00
Steel	3.00	4.00
Department A Labor	5.00	4.00
Department B Labor	8.00	12.00
Department C Labor	7.50	5.00
Flexible other factory & selling	4.00	6.00
Committed Costs
Committed factory & selling	19.00	22.00
Total costs	48.50	56.00
Protit	$11.50	$14.00

The market survey performed by the sales manager showed that the company could sell as many of either type of rod as it could produce. However, the sales manager urged that the needs of three of the big gold mines must be satisfied in full, even though doing so meant producing a large number of the 3/4-inch rods, which had less profit than the 1-inch rods. The quantities required by these three gold mines amounted to 200,000 3/4-inch rods and 200,000 1-inch rods.

Because the 1-inch rods are more profitable than the 3/4-inch rods, the treasurer suggested that the remaining capacity be used to produce 1-inch rods. Based on this plan, the treasurer produced the following budgeted income statement for the forthcoming year.

Sales are expected to occur evenly throughout the year.

	3/4-INCH	1-INCH
Sales (in units)	200, 000	233,333
Sales (in dollars)	$12,000,000	$16,333,310
Flexible costs	5,900,000	7,933,322
Committed costs	3,800,000	5,133,326
Total costs	9,700,000	13,066,648
Profit	$2,300,000	$3,266,662

Jones, as her first assignment, is asked by the president to comment on the budgeted income statement. Specifically, the president feels that capacity might be better used with a different sales mix. He wants to know just how much it is costing the company in just profits supply the full needs of the three big gold-mining customers. He feels that it might be more profitable to produce only the 1-inch rods.

Jones gathers the following additional information before making her recommendations: Wolfram is purchased at $10 per kilogram f 1.000 grams). The 3/4-inch tips use an average of 200 grams, and the 1-inch tips 300 grams. The special alloy steel costs $4,000 per 2,000 pounds. The 3/4-inch rods use 1.5 pounds, and the 1 -inch rods 2 pounds. Direct-labor costs per hour follow:

Department A	$20.00
Department B	$16.00
Department C	$10.00

Tip fabricating (Department A) is a skilled process. The small tips require detailed work. Owing to the nature of the work, the labor is considered committed because it would be difficult to replace. Committed factory and selling costs have been allocated using the cost drivers thought to explain their behavior.

Required

If you were Jones, what would be your recommendations to the president?

*This problem is adapted from a problem prepared by C. Hormgren for Cos; Accomling, 5th ed. (Prentice Hall. 1982).

Answer rating: 100% (QA)

The president along with the president wants to review the sales strategy after the recent cost and ... View the full answer