A small manufacturing company in Toronto, Ontario, manufactures three types of p

ID: 2425821 • Letter: A

Question

A small manufacturing company in Toronto, Ontario, manufactures three types of pumps used in a variety of applications. For many years the company has been profitable and has operated at capacity. However, in the last two years prices on all pumps were reduced and selling expenses increased to meet competition and keep the plant operating at capacity. Second-quarter results for the current year, which follow, typify recent experience.

Maria Carlo, the company's president, is concerned about the results of the pricing, selling, and production prices. After reviewing the second-quarter results she asked her management staff to consider the following three suggestions:

Discontinue the S-Pump line immediately. S-Pumps would not be returned to the product line unless the problems with the pump can be identified and resolved.

Increase quarterly sales promotion by $440,000 on the R-Pump product line in order to increase sales volume by 15 percent.

Cut production on the F-Pump line by 50 percent, and cut the traceable advertising and promotion for this line to $130,000 each quarter.

Justin Sperry, the controller, suggested a more careful study of the financial relationships to determine the possible effects on the company’s operating results of the president’s proposed course of action. The president agreed and assigned JoAnn Brower, the assistant controller, to prepare an analysis. Brower has gathered the following information.

The selling and administrative expense is allocated to the three pump lines based on average sales volume over the past three years.

Special selling expenses (primarily advertising, promotion, and shipping) are incurred for each pump as follows:

a. Calculate the net impact on income before taxes for each of the three suggestions.

b. calculate the contribution margin for S pump.

c. calculate the contribution per direct-labor dollar for r pump and f pump.

Explanation / Answer

a) Net impact on income before taxes for each of the three suggestions. $ in thousands Option-1 R-Pumo ($) F-Pump ($) Total ($) Sales 6,956 4,674 11,630 Cost of goods sold 4,556 4,000 8,556 Gross margin 2,400 674 3,074 Selling and administrative expenses 1,609 961 2,570 Income before taxes 791 -287 504 Income before taxes in quarter2 -390 Net increase/(decrease) in income 114 Option-1 $ in thousands R-Pumo ($) F-Pump ($) S-Pump ($) Total ($) Sales 7999.4 4,674 4,352 17,025 Cost of goods sold 5239.39 4,000 4,593 13,832 Gross margin 2760.01 674 -241 3,193 Selling and administrative expenses 1,609 961 653 3,223 Additional sales promotion expenses 440 0 0 440 Income before taxes 711 -287 -894 -470 Income before taxes in quarter2 -390 Net increase/(decrease) in income -860 Option-1 $ in thousands R-Pumo ($) F-Pump ($) S-Pump ($) Total ($) Sales 6,956 2337 4,352 13,645 Cost of goods sold 4,556 2000 4,593 11,149 Gross margin 2,400 337 -241 2,496 Selling and administrative expenses 1,609 651 653 2,913 Income before taxes 791 -314 -894 -417 Income before taxes in quarter2 -390 Net increase/(decrease) in income -807 b) Contribution margin for S pump. $ Sales 680 Less: Variable cost Direct Material 164 Direct labour 208 Variable manufacturing overhead 208 Total variable cost -580 Contribution per unit 100 c) Contribution per direct-labor dollar for r pump and f pump. R-Pumo ($) F-Pump ($) Sales 740 410 Less: Variable cost Direct Material -107 -65 Direct labour -148 -88 Variable manufacturing overhead -163 -118 Contribution per unit 322 139 Contribution per diect labour 2.18 1.58

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A small manufacturing company in Toronto, Ontario, manufactures three types of p

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A small manufacturing company in Toronto, Ontario, manufactures three types of p

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