Mendel Paper Company

Topics: Costs, Variable cost, Cost Pages: 5 (1378 words) Published: September 1, 2014
Mendel Paper Company
Mendel Paper Company has been doing relatively well with the sales of computer paper, napkins, place mats, and poster board. With more people eating out, the demand for napkins and place mats have increased. Computer paper and poster boards have slowly increased in demand as well. However, there is concern at the company with the fixed cost of operations. Marlene Herbert, the plant superintendent, said, “As we have automated our operation, we have experienced increases in fixed overhead and even variable overhead. And, we will have to add more equipment since it appears that we need even more plant capacity. We are operating over our normal capacity as it is.” (Case 2B). With the new production costs added in, will the Mendel Paper Company have what it takes to succeed?

For computer paper for the next fiscal quarter, according to the information given by the superintendent, Mendel Paper Company will receive a profit of $240,000.00. If 30,000 units are produced and sold at $14.00 then the total sales will be $420,000.00. However it costs the company $6.00 to produce each unit. So, 30,000 units at $6.00 a unit costs the company $180,000.00. The total sales cost of $420,000.00 minus the cost of labor of $180,000.00 equals the profit of $240,000.00. News came in however from the vice-president of purchasing that the company has firm orders for 35,000 cartons of computer paper. So, if the company continues to sell each unit of computer paper at $14.00 then the total cost of sales is $490,000.00. It still costs Mendel Paper Company $7.00 to produce each unit, therefore costing the company $245,000.00. Making the total profit of computer paper $245,000.00.

The same formula can be applied to the napkins that Mendel Paper Company produces. The company is expected to sell 120,000 units of napkins for the next fiscal quarter. They sell the napkins at $7.00. If they sell 120,000 napkins at $7.00 then they will make $840,000.00. However, you have to include the costs that it takes the company to produce the napkins. It costs the company $4.50 per unit to make the napkins, thus costing the company $540,000.00 if 120,000 units are sold. The profit for producing the napkins is $300,000.00.

Mendel Paper Company also produces place mats for restaurants. The company is expected to sell 45,000 units of place mats for the next fiscal quarter. They sell the place mats at $12.00. If they sell 45,000 units of place mats at $12.00 then they will make $540,000.00. However, it costs the company $3.60 per unit of place mats to be made costing them $162,000.00 per place mat. Making a profit of $378,000.00. Bad news came in saying that the cost of production as gone up from $3.60 per place mat unit to $4.00 per unit. Now it costs the company $180,000.00 to produce a place mat unit, making the profits $360,000.00.

The final product that the Mendel Paper Company produces is poster board. It costs the company $2.50 in labor and materials to produce a unit of poster board. They are expected to sell 80,000 units in the next fiscal quarter. It will cost the company $200,000.00 if the company produces 80,000 units. On the plus side, they sell each unit of poster board at $8.50, this is $6.00 more than what it costs to produce each unit. If they sell 80,000 units at $8.50 per unit then the total of sales is $680,000.00. The total of sales $680,000.00 minus the cost it takes to produce each unit, $200,000.00 gives the company the largest profit of $480,000.00. Producing poster board brings in the largest profit of all other products.

“The break-even point is the volume where total revenue equals total cost. It indicates how many units of product must be sold or how much revenue is needed to at least cover all costs” (Schneider, 2012). To figure out the break-even point, you have to use the formula: fixed cost divided by the selling price minus variable cost. Mendel Paper Company’s fixed cost is $420,000.00. To figure out the...

References: Case 2B – Mendel Paper Company. (N.D.). Retrived from website
Schneider, A. (2012). Managerial accounting: Decision making for the service and manufacturing sectors. San Diego, CA: Bridgepoint Education.
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