Strategic Initiatives and CSR
Get Hitched Inc. is a production company that is in the processof testing a strategic initiative aimed at increasing gross profit.The company’s current sales revenue is $2,100,000. Currently, thecompany’s gross profit is 35% of sales, but the company’s targetgross profit percentage is 40%. The company’s current monthly costof production is $1,365,000. Of this cost, 40% is for labor, 20% isfor materials, and 40% is for overhead.
The strategic initiative being tested at Get Hitched is aredesign of its production process that splits the process into twosequential procedures. The make up of the costs of production forProcedure 1 is currently 50% direct labor, 45% direct materials,and 5% overhead. The makeup of the costs of production forProcedure 2 is currently 50% direct labor, 20% direct materials,and 30% overhead. Company management estimates that Procedure 1costs twice as much as Procedure 2.
1. Determine what the cost of labor, materials,and overhead for both Procedures 1 and 2 would need to be for thecompany to meet its target gross profit at the current level ofsales.
Cost makeup of Procedure 1:
| Direct Labor | $ |
| Direct Materials | |
| Overhead | |
| Total | $ |
Cost makeup of Procedure 2:
| Direct Labor | $ |
| Direct Materials | |
| Overhead | |
| Total | $ |
2. The company’s actual direct materials costis $390,600 for Procedure 1. Determine the actual cost of directlabor, direct materials, and overhead for each procedure, and thetotal cost of production for each procedure.
Cost makeup of Procedure 1:
| Direct Labor | $ |
| Direct Materials | |
| Overhead | |
| Total | $ |
Cost makeup of Procedure 2:
| Direct Labor | $ |
| Direct Materials | |
| Overhead | |
| Total | $ |
3. The company is planning a CSR initiative toreuse some of the indirect materials used in production duringProcedure 2. These indirect materials normally make up 70% of theoverhead cost for Procedure 2, but the CSR initiative would reducethe usage of indirect materials. Determine what the maximum newcost of these indirect materials could be for Procedure 2 if thisCSR initiative is expected to enable the company to meet its targetgross profit percentage (holding all other costs constant).
Maximum new cost of P2 overhead materials:
$
