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

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. Fill in the chart below.

b. calculate the contribution margin for S pump.

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

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.

Explanation / Answer

NET INCOME STATEMENT

PARTICULARS F PUMP R PUMP S PUMP

B) CONTRIBUTION MARGIN FOR S PUMP

CONTRIBUTION = SALES - VARIABLE COST

CONTRIBUTION= $4352000-$3712000

CONTRIBUTION = $640000

C) CONTRIBUTION PER DIRECT LABOR DOLLAR

FOR R PUMP = CONTRIBUTION PER UNIT/ DIRECT LABOR PER UNIT

= 322/148

= 2.176

FOR F PUMP = CONTRIBUTION PER UNIT/ DIRECT LABOR PER UNIT

=139/88

= 1.579

Sales $6,956,000 $4,674,000 $4,352,000 Direct Materials $1,005,800 $741,000 $1,049,600 Direct Labor $1,391,200 $1,003,200 $1,331,200 Variable manufacturing overhead $1,532,200 $1,345,200 $1,331,200 Fixed manufacturing overhead $626,792 $910,632 $881,024 Quarterly Adversting and promotion $770,000 $440,000 $260,000 shipping expenses $413,600 $296,400 $640,000 Net Operating Income / Loss $1216408 (-)$62432 (-)$1141024

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