Strategic Initiatives and CSR Blue Skies Inc. is a retail gardening company that is piloting a new strategic initiative

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Strategic Initiatives and CSR
Blue Skies Inc. is a retail gardening company that is piloting a
new strategic initiative aimed at increasing gross profit.
Currently, the company’s gross profit is 23% of sales, and its
target gross profit percentage is 28%. The company’s current
monthly sales revenue is $600,000.
The new initiative being piloted is to produce goods in-house
instead of buying them from wholesale suppliers. Its in-house
production process has two procedures. The makeup of the costs of
production for Procedure 1 is 40% direct labor, 45% direct
materials, and 15% overhead. The makeup of the costs of production
for Procedure 2 is 60% direct labor, 30% direct materials, and 10%
overhead. Assume that Procedure 1 costs twice as much as Procedure
2.
1. Determine what the cost of labor,
materials, and overhead for both Procedures 1 and 2 would need to
be for the company to meet its target gross profit.
Cost makeup of Procedure 1:
Cost makeup of Procedure 2:
The company’s actual labor cost is $120,000 for Procedure
1. Determine the actual cost of direct labor, direct materials, and
overhead for each procedure, and the total cost of production for
each procedure.
Cost makeup of Procedure 1:
Cost makeup of Procedure 2:
3. The company is planning a CSR
initiative to recycle the indirect materials used in production
during Procedure 1. The company is paid for any of the indirect
materials it recycles, and it applies the income from these
payments as a direct offset to the cost of the direct materials.
These indirect materials normally makeup 80% of the overhead cost
for Procedure 1. Determine what the maximum new cost (net of
recycling revenues) of these indirect materials could be for
Procedure 1 if this CSR initiative were to enable the company to
meet its target gross profit percentage without changing any other
costs.
Maximum new cost of P1 overhead materials: