Solved: The PTO Division of Galva Manufacturing

Company produces power t

The PTO Division of Galva Manufacturing Company produces power take-off units for the farm
equipment business. The PTO Division, headquartered in Peoria, has a newly renovated,
automated plant in Peoria and an older, less-automated plant in Moline.
Both plants produce the same power take-off units for farm tractors that are sold to most
domestic and foreign tractor manufacturers.
The PTO Division expects to produce and sell 192,000 power take-off units during the coming
year. The division production manager has the following data available regarding the unit costs,
unit prices, and production capacities for the two plants.
• All fixed costs are based on a normal year of 240 work days. When the number of work days
exceeds 240, variable manufacturing costs increase by $3 per unit in Peoria and $8 per unit in
Moline. Capacity for each plant is 300 working days.
• Galva Manufacturing charges each of its plants a per-unit fee for administrative services such
as payroll, general accounting, and purchasing because management considers these services
to be a function of the work performed at the plants. For each plant at Peoria and Moline, the
fee is $6.50 and represents the variable portion of general and administrative expense.
Wishing to maximize the higher unit profit at Moline, PTO's production manager has decided to
manufacture 96,000 units at each plant. This production plan results in Moline's operating at
capacity and Peoria's operating at its normal volume. Galva's corporate controller is not happy
with this plan because she does not believe it represents optimal usage of PTO's plants.

Required
1. Determine the annual breakeven units for each PTO plant.
2. Determine the operating income that would result from the division production manager’s
plan to produce 96,000 units at each plant.
3. Determine the optimal production plan to produce the 192,000 units at PTO’s plants in
Peoria and Moline and the resulting operating income for the PTO Division. Be sure to support
the plan with appropriate calculations.
(CMAAdapted)

ANSWER
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