Deciding where to produce?
The PTO Division of the Galva manufacturing company produces the same power take-off units for the farm equipment business in two plants, a newly renovated, automated plant in Peoria, and an older , less automated plant in Moline. The PTO Division expected to produce and sell 192,000 power take-off units during the coming year. The following data are available for the two plants.
Peoria Moline
Selling price $150 $150
Variable manufacturing cost per unit $72 $88
Fixed manufacturing cost per unit 30 15
Sales commission (5% of revenues) 7.5 7.5
Variable marketing and distribution cost per unit 6.5 6.5
Fixed marketing and distribution cost per unit 19 14.5
Total cost per unit 135 131.5
Operating income per unit $15 $18.5
Production rate per day 400 units 320units
All fixed costs per unit are calculated based on a normal year of 240 working days. When the number of working days exceeds 240, variable manufacturing costs increase by $3 per unit in Peoria and $8 per unit in Moline. Capacity for each plant is 300 working days per year.
Wishing to take advantage of the higher operating income per unit at Moline, PTO’s production manager has decided to manufacture 96,000 units at each plant. This production plan results in Moline operating at capacity(320 units per day ×300 days) and Peoria operating at its normal volume (400 units per day ×240days). Galva’s corporate controller is not happy with this plan because he does not believe it represents optimal usage of PTO’s plants.
Required:
1. determine the breakeven point in units for the Peoria and Moline plants.
2. calculate the operating income that would result from the production manager’s plan to produce 96,000 units at each plant.
3. determine how the production of the 192,000 units should be allocated between the Peoria and Moline plants to maximize operating income for the PTO Division. What is the maximum operating income that the PTO Division can earn? Show your calculations.