Exhibit 1 Brown Manufacturing Company Income Statement as of December 31, 2017 S

Question

Exhibit 1 Brown Manufacturing Company Income Statement as of December 31, 2017 Sales Less: costs of products sold Gross margn SG&A; Other costs Operating income Less: Interest expense Plus: Interest income Income before tax Income taxes Net income $36,717,500.0 $15,567,500.0 9,350,000.0 $2,100,000.0 4,117,500.0 $420,000.0 $150,000.0 $3,847,500.0 $1.346,625.0 $2,500,875.0 Exhibit 2 Brown Manufacturing Company Standard Costs as of December 31, 2017 Model A Model B Model C Notes 75,000 100,000 205,000 Planned units Per unit Sales price Direct costs $142.50 $104.50 $76.00 17.0 1.0 38.0 10.0 16.0 26.0 7.0 directly related to volume 4.0 directly related to volume 11.0 Materials Labor Subtotal Indirect cost: 7.0 10.0 12.0 8.0 22.0 12.0 11.0 2.0 8.0 6.0 3.0 1.0 directly related to volume 4.0 50% variable, the rest is fixed 4.0 50% variable, the rest is fixed 1.0 unrelated to volume 5.0 unrelated to volume 3.0 unrelated to volume 1.0 unrelated to volume Supplies Labor Energy Supervision Depreciation Accounting/Legal/IT su Other Fixed Costs Subtotal Total cost Profitability 7.0 6.0 2.0 $82.0 $34.0 $19.0 120.0 $60.0 $30.0 22.5 $44.5 $46.0

Explanation / Answer

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If Shed A is discontinued, the contribution margin it was earning will be lost. As a result the fixed cost it was covering will now be borne by the other products namely shed B & C. let’s quantify all these:

Contribution lost: $86.50

Fixed cost covered by Shed A: Indirect labor (50%) + Indirect energy (50%) + Supervision + Depreciation + Accounting & legal + Other costs = ($5.00 + $6.00 + $8.00 + $22.00 + $12.00 + $11.00) = $64.00

Revised profitability: ($44.50 + $46.00) - $64.00 = $26.50

If the company focusses more on selling Shed C than Shed A, it’d result in decrease in 10000 unit level sales of shed A and the same level increase in Shed C.

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Please note that the variable costs has a tendency of changing in totality but remains fixed per unit of output. On the contrary, Fixed cost tends to remain fixed in totality but becomes variable with a number of units of output changes. In the given scenario, when the volume of Shed C changes from 205000 to 225500 (205000 * 1.10) variable costs in totality will change. Say Material cost, $7 * 205000 = $1435000 to $1578500 ($7 * 225500). On the other hand fixed cost say depreciation of $5.00 * 205000 = $1025000 is now to be borne by 225500 units resulting in the per unit cost of depreciation to dip into $1025000 / 225500 = $4.55 (Approx.) All the calculations for fixed costs have been performed following the same principle.

Brown manufacturing Company Current Contribution Margins Shed A Shed B Shed C Sales Price 142.50 104.50 76.00 Less: Variable costs Materials 17.00 10.00 7.00 Labor 21.00 16.00 4.00 Indirect Supply 7.00 2.00 1.00 Indirect Labor 5.00 4.00 2.00 Indirect Energy 6.00 3.00 2.00 Total VC 56.00 35.00 16.00 Contribution Margin (Sales - VC) 86.50 69.50 60.00

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