In 2011, the cost of producing a foot of pipe was $0.30, and the selling price was $0.39 per foot. In 2012, production costs increased to $0.40 per foot, although the selling price remained at $0.39.
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The increase in cost was obvious. Material and labor had remained fairly constant per foot of pipe, but over head costs, which were $0.15 per foot in 2011, had increased to $0.26 in 2012.The problem was that most overhead costs were fixed, but output had decreased due to weak crop prices and a corresponding decrease in spending on irrigation projects. Bob Elger, CFO of Jensen, reviewed the data generated by the company's process costing system.