Reference no: EM133097369

Question - Jensen PVC, Inc. produced Polyvinyl Chloride irrigation pipes. In 2020, The cost of producing a foot of pipe was $0.30, and the selling price was $0.39 per foot. In 2021, production costs increased to $0.40 per foot, although the selling price remained at $0.39.

The increase in cost was obvious. Material and labor had remained fairly constant per foot of pipe, but overhead costs, which were $0.15 per foot in 2020, increased to $0.25 in 2021. The problem was that most overhead costs were fixed, but output had decreased due to weak crop prices and corresponding decrease in spending on irrigation projects. Bob Elger, CFO of Jensen, reviewed the data generated by the company's process costing system.

In 2020, overhead costs in all of the company's departments were $1,500,000, but pipe production decreased to 6,000,000 feet.. At a recent meeting of the senior management team, Bob noted "The problem is that we are not making use of our capacity. We could easily produce 15,000,000 feet of pipe give our state of the art equipment, but we are operating at less than 50% capacity"

Bob Estimates that to sell 15,000,000 feet of pipe in the current market, the company would have to lower its price to $0.35 per foot which is even lower than the current cost per foot of $0.40. Would decreasing the price bee a good decision?