To help in the analysis, Kaylin gathered the following data for LLHC for 20X1:Tons sold: 10Average cartons per shipment: 2Average shipments per ton: 7 1) Using the new costs computed in Requirement 2, compute the profit per ton of LLHC. Compare this with the profit per ton computed by using the old method. Do you think that this same effect would be realized for other low-volume products? Explain. Sharp Paper Inc. has three paper mills, one of which is located in Memphis, Tennessee. The Memphismill produces 300 different types of coated and uncoated specialty printing papers. Management wasconvinced that the value of the large variety of products more than offset the extra costs of theincreased complexity.During 2011, the Memphis mill produced 120,000 tons of coated paper and 80,000 tons of uncoatedpaper. Of the 200,000 tons produced, 180,000 were sold. Sixty products account for 80 percent of thetons sold. Thus, 240 products are classified as low-volume products.Lightweight lime hopsack in cartons (LLHC) is one of the low-volume products. LLHC is produced inrolls, converted into sheets of paper, and then sold in cartons. In 2011 the cost to produce and sell oneton of LLHC was as follows:Direct materials:Furnish (3 different pulps)Additives (11 different items)Tub sizeRecycled scrap paperTotal direct materialsDirect laborOverhead:Paper machine ($100 per ton x 2,500 pounds)Finishing machine ($120 per ton x 2,500 pounds)Total overheadShipping and warehousingTotal manufacturing and selling cost2,225 pounds $ 450200 pounds75 pounds50010(296 pounds)(20)$ 940$450$ 125150$ 275$30$1,695Overhead is applied by using a two-stage process. First, overhead is allocated to the paper andfinishing machines by using the direct method of allocation with carefully selected cost drivers.Second, the overhead assigned to each machine is divided by the budgeted tons of output. Theserates are then multiplied by the number of pounds required to produce one good ton.In 2011, LLHC sold for $2,400 per ton, making it one of the most profitable products. A similarexamination of some of the other low-volume products revealed that they also had very respectableprofit margins. Unfortunately, the performance of the high volume products was less impressive, withmany showing losses or very low profit margins. This situation led Ryan Chesser to call a meeting withhis marketing vice president, Jennifer Woodruff, and his controller, Kaylin Penn.Ryan: The above-average profitability of our low-volume specialty products and the poor profitperformance of our high-volume products make me believe that we should switch our marketingemphasis to the low-volume line. Perhaps we should drop some of our high-volume products,particularly those showing a loss.Jennifer: I'm not convinced that solution is the right one. I know our high-volume products are of highquality, and I'm convinced that we are as efficient in our production as other firms. I think thatsomehow our costs are not being assigned correctly. For example, the shipping and warehousingcosts are assigned by dividing these costs by the total tons of paper sold. Yet ... Kaylin: Jennifer, I hate to disagree, but the $30-per-ton charge for shipping and warehousing seemsreasonable. I know that our method to assign these costs is identical to a number of other papercompanies.Jennifer: Well, that may be true, but do these other companies have the variety of products that wehave? Our low-volume products require special handling and processing, but when we assignshipping and warehousing costs, we average these special costs across our entire product line. Everyton produced in our mill passes through our mill shipping department and is either sent directly to thecustomer or to our distribution center and then eventually to customers. My records indicate quiteclearly that virtually all of the high-volume products are sent directly to customers, whereas most ofthe low-volume products are sent to the distribution center. Now, all of the products passing throughthe mill shipping department should receive a share of the $2,000,000 annual shipping costs. I'm notconvinced, however, that all products should receive a share of the receiving and shipping costs of thedistribution center as currently practiced.Ryan: Kaylin, is this true? Does our system allocate our shipping and warehousing costs in this way?Kaylin: Yes, I'm afraid it does. Jennifer may have a point. Perhaps we need to reevaluate our methodto assign these costs to the product lines.Ryan: Jennifer, do you have any suggestions concerning how the shipping and warehousing costsshould be assigned?Jennifer: It seems reasonable to make a distinction between products that spend time in thedistribution center and those that do not. We should also distinguish between the receiving andshipping activities at the distribution center. All incoming shipments are packed on pallets and weighone ton each (there are 14 cartons of paper per pallet). In 2011, the receiving department processed56,000 tons of paper. Receiving employs 15 people at an annual cost of $600,000. Other receivingcosts total about $500,000. I would recommend that these costs be assigned by using tons processed.Shipping, however, is different. There are two activities associated with shipping: picking the orderfrom inventory and loading the paper. We employ 30 people for picking and 10 for loading, at anannual cost of $1,200,000. Other shipping costs total $1,100,000. Picking and loading are moreconcerned with the number of shipping items than with tonnage. That is, a shipping item may consistof two or three cartons instead of pallets. Accordingly, the shipping costs of the distribution centershould be assigned by using the number of items shipped. In 2011, for example, we handled 190,000shipping items.Ryan: These suggestions have merit. Kaylin, I would like to see what effect Jennifer's suggestions haveon the per-unit assignment of shipping and warehousing for LLHC. If the effect is significant, then wewill expand the analysis to include all products.Kaylin: I'm willing to compute the effect, but I'd like to suggest one additional feature. Currently, wehave a policy to carry about 25 tons of LLHC in inventory. Our current costing system totally ignoresthe cost of carrying this inventory. Since it costs us $1,665 to produce each ton of this product, we aretying up a lot of money in inventory-money that could be invested in other productive opportunities.In fact, the return lost is about 16 percent per year. This cost should also be assigned to the units sold.

The gross profit is determined by deducting the manufacturing cost from the selling price of the…

Answered: harp Paper Inc. has paper mills, phis,…

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q