Break-Even Analysis; Plant Shutdown; Stockholders’ Return. The manage- ment of the SouthernTex Cottonseed Mills, Inc. has requested its cost analysis section to assist in the development of information to be used for managerial decisions. The company’s plant has the capacity to process 20,000 tons of cotton- seed per year with the following yield per ton of cottonseed:
A verage Yield per
TOil of Cottonseed
A verage Selling Price per Trade Unit
Oil . Meal . Hulls . Lint . Waste .
$ .15 per lb.
50.00 per ton
20.00 per ton
3.00 per hundredweight (cwt.)
A special marketing study revealed that the company can expect to sell its entire output for the coming year at the average selling prices listed above. The company’s costs are as follows:
Materials costs: Average price paid, $35 per ton
Processing costs: Variable costs, $9 per ton of cottonseed put into process
Fixed costs, $108,000 per year
Marketing costs: All variable, $20 per ton sold
Administrative costs: All fixed, $90,000 per year
Required:(1) A detailed analysis of the company’s break-even point.
(2) In view of conditions in the cottonseed market, the management would also like to know the average maximum amount the company can afford to pay for a ton of cottonseed which management has defined as the amount that would result in the company’s having losses no greater when operating than when closed down under the existing cost and revenue structure. Management states that the fixed costs shown in the break-even analysis will continue unchanged even when the operations are shut down. Assume that the company is to process 20,000 tons of cottonseed.
(3) A statement to management mentioning and discussing those factors, other than the costs entered into in the computation of (2), that should be con- sidered in deciding whether to shut down the plant.
(4) The stockholders consider 25% before corporate income taxes the mini- mum satisfactory return on their investment in the business. The stockholders’ equity in the company is $968,000. Compute the maximum average amount that the company can pay for a ton of cottonseed to realize the minimum satisfactory return on the stockholders’ investment when operating at capacity.
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