In Playtenâ€™s FPDiv, the assembly line process uses a joint input of a common rubber compound to create a grooming brush (Brendaâ€™s product), a treat dispensing toy in the shape of a fish (Finnâ€™s product) and up until December 31, 2020, scrap rubber worth nothing. Back in September 2020 Michael pitched an idea to Cecily the CFO that, with a small investment, some unused equipment from another department could be refurbished and added to the end of the production process to take the scrap rubber and create toy mice. This would add an extra $1,500 to the assembly line and labour costs incurred each month. The competition had a similar rubber toy mouse that was selling for $1.50. The idea was approved, modifications to the equipment made, advertising and promotions were done and in January 2021, the new product line of toy mice was launched. Michael received a promotion and is now the product line manager for mice.
At the meeting:
The accounting team presented the summary results from the last quarter. Gross margin % for the FPDiv is 28.41%. Sales have remained consistent for the last quarter with a steady 500 kg of rubber compound per month being used. All products that are being produced are sold by the end of the quarter. The lean production process implemented last year is working great with no inventory being held. The forecast is to continue producing the same level of product per month for the remainder of the year. From a monthâ€™s production 3,500 brushes are produced, each one using 100 g of rubber. The brushes have a selling price of $4.00 per brush. Each month, 5,500 fish are produced and they have a selling price of $5.00 per fish. The left over 12.50 kg of rubber that used to be scrap is now used to create the mice with each mouse using 5 g of rubber and selling for $1.00 per mouse. The cost of the rubber compound used in the production process is $25 per kg. The current cost to run the assembly line machinery and labour is $19,000 per month.
Should FPDiv continue with the toy mouse product line?