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Prescott Manufacturing operates several plants, each of which produces a different product. Early in the current year, Mr.Addisu was hired as the new manager of the Brook Plant. At year-end, all the plant managers are asked to summarize the operations of their plants at a meeting of the company’s board of directors. Addisu displayed the following information on a chart as he made his presentation:
Inventories of finished goods:
Beginning of the year (30,000 units in the current year
and 10,000 units last year). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $255,000 $ 85,000
End of the year (20,000 units in the current year and
30,000 units last year) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202,000 255,000
Cost of finished goods manufactured . . . . . . . . . . . . . . . . . . . . . . . . 909,000 1,020,000
Addisu made the following statements to the board: “As you know, sales volume has remained constant for the Brook Plant. Both this year and last, our sales amounted to 100,000 units.
We have made real gains, however, in controlling our manufacturing costs. Through efficient plant operations, we have reduced our cost of finished goods manufactured by over $100,000. These economies are reflected in a reduction of the manufacturing cost per unit sold from $10.20 last year ($1,020,000/ 100,000 units) to $9.09 in the current year ($909,000 /100,000 units).”Assume that you are asked by board members of the company to evaluate Addisu’s statement.
a.As a preliminary step to your analysis, compute the following for the Brook Plant in each of the two years:
1.Cost of goods sold.
2.Number of finished units manufactured.
3.Average cost per unit manufactured.
4.Average cost per unit sold.
b.Evaluate the statements made by Addisu. Comment specifically on Addisu’s computation of the manufacturing cost of units sold and on whether it appears that the reduction in the cost of finished goods sold was in fact achieved through more efficient operations.
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