Question

Accounting 311 Exam #2 Take Home Question Due Tuesday November 26th Spencer Chemical Corporation produces an oil-based chemical product which it sells to paint manufacturers. In 2017, the company incurred $344,000 of costs per month to produce 40,000 gallons of the chemical each month. The selling price of the chemical is $12.00 per gallon. The costs per unit to manufacture a gallon of the chemical are presented below: Direct materials Direct labor 1.20 Variable manufacturing overhead .80 Fixed manufacturing overhead Total manufacturing costs $8.60 $6.00 60 The company is now considering manufacturing the paint itself. If the company processes the chemical further and manufactures the paint itself, the following additional costs per gallon will be incurred: Direct materials $1.70, Direct labor $.60, Variable manufacturing overhead $.50. No increase in fixed manufacturing overhead is expected. The company can sell the paint at $15.50 per gallon. Gene Spencer, President of Spencer Corporation has requested your team do the following: 1. Determine the incremental per gallon increase in income and the total increase in monthly income before tax if the company begins manufacturing the paint. 2. What "Qualitative Factors" might be worth considering when analyzing whether the company should go into manufacturing paint. In additional to the above request: Gene Spencer, Jr., son of the Spencer Corporation's President Gene Spencer, has informed your team that he is in line to take over the company next year. He wants to know what income he could earn by simply ceasing operations and instead, leasing the building to another manufacturing company. He grew up in the business, and he is starting to burn out, and feels he should move to Hawaii and learn how to surf and take life easy. He has indicated to you that existing fixed manufacturing overhead would decrease by 60% and he could lease the building and manufacturing equipment to another company for $36,000 per month. pencer, Jr. with an analysis of income alternatives if he simply ceased operations and moved to Hawaii, or continued running the business. 2. Identify "Qualitative Factors" you feel Gene, Jr. should take into consideration.

Answer 1

Existing Total cost if Incremental Paint is Cost manufactured 15.5 7.7 Selling Price per gallon Direct material Direct Labour Variable Overheads 1.8 1.3 Os Contribution per Gallon Incremental per gallon increase in Income = 4.7-4 = 0.7 per gallon Increase in Monthly Income Incremental per gallon increase in Income Gallons of paint produced 0.7 40000 Increase in Monthly Income (0.7*40000) 28000