The Leisure Products (LP) Company manufactures lawn and patio furniture
Case Study
The Leisure Products (LP) Company manufactures lawn and patio furniture. Most of its output is sold to do- it- yourself warehouse stores (e. g., Lowes Home Improvement) and to retail hardware and department store chains (e. g., True Value and JCPenney), who then distribute the products under their respective brand names. LP is not involved in direct retail sales. Last year the firm had sales of $ 35 million. One of LPs divisions manufactures folding (aluminum and vinyl) chairs. Sales of the chairs are highly seasonal, with 80 percent of the sales volume concentrated in the January June period. Production is normally concentrated in the September May period. Approximately 75 percent of the hourly workforce (un-skilled and semiskilled workers) is laid off (or takes paid vacation time) during the June August period of reduced output. The remainder of the workforce, consisting of salaried plant management (line managers and supervisors), maintenance, and clerical staff, are retained during this slow period. Maintenance personnel, for example, perform major overhauls of the machinery during the slow summer period. LP planned to produce and sell 500,000 of these chairs during the coming year at a projected selling price of $ 7.15 per chair. The cost per unit was estimated as follows:
Direct Labor
$2.25
Materials
2.30
Plant Overhead*
1.15
Administrative & selling expense*
0.80
TOTAL
$6.50
* These costs are allocated to each unit of output based on the projected annual production of 500,000 chairs.
A 10 percent markup ($ 0.65) was added to the cost per unit in arriving at the firms selling price of $ 7.15 (plus shipping). In May, LP received an inquiry from Southeast Department Stores concerning the possible purchase of folding chairs for delivery in August. Southeast indicated that they would place an order for 30,000 chairs if the price did not exceed $ 5.50 each (plus shipping). The chairs could be produced during the slow period using the firms
The Leisure Products (LP) Company manufactures lawn and patio furniture. Most of its output is sold to do- it- yourself warehouse stores (e. g., Lowes Home Improvement) and to retail hardware and department store chains (e. g., True Value and JCPenney), who then distribute the products under their respective brand names. LP is not involved in direct retail sales. Last year the firm had sales of $ 35 million. One of LPs divisions manufactures folding (aluminum and vinyl) chairs. Sales of the chairs are highly seasonal, with 80 percent of the sales volume concentrated in the January June period. Production is normally concentrated in the September May period. Approximately 75 percent of the hourly workforce (un-skilled and semiskilled workers) is laid off (or takes paid vacation time) during the June August period of reduced output. The remainder of the workforce, consisting of salaried plant management (line managers and supervisors), maintenance, and clerical staff, are retained during this slow period. Maintenance personnel, for example, perform major overhauls of the machinery during the slow summer period. LP planned to produce and sell 500,000 of these chairs during the coming year at a projected selling price of $ 7.15 per chair. The cost per unit was estimated as follows:
Direct Labor
$2.25
Materials
2.30
Plant Overhead*
1.15
Administrative & selling expense*
0.80
TOTAL
$6.50
* These costs are allocated to each unit of output based on the projected annual production of 500,000 chairs.
A 10 percent markup ($ 0.65) was added to the cost per unit in arriving at the firms selling price of $ 7.15 (plus shipping). In May, LP received an inquiry from Southeast Department Stores concerning the possible purchase of folding chairs for delivery in August. Southeast indicated that they would place an order for 30,000 chairs if the price did not exceed $ 5.50 each (plus shipping). The chairs could be produced during the slow period using the firms