Maria Carlo, the company\'s president, is concerned about the results of the pri
ID: 2489838 • Letter: M
Question
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 $350,000 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 $85,000 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:
Calculate the net impact on income before taxes for each of the three suggestions.
Calculate contribution margin for S-Pump.
Calculate the contribution per direct-labor dollar for R-Pump and F-Pump. (Round your answers to 2 decimal places.)
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:
Explanation / Answer
Part (a) 1. Income before taxes will have no impact as there was a operating profit of $ 0 on S-pump when Fixed operating overhead is treated as sunk cost.
2. Income will reduce by $ 38.5/ unit of F-pump and increase by $ 265,000 for reduction in advertisement cost.
3. Increase in Income by $ 36.3 per unit and redcution by $ 350,000 for extra sales promotion
Part(b)
Contribution of S-pump is $ 0
Part (c)
Product S-Pump Unit Sale Price $ 590 Direct Material $ 155 Direct Labor $ 190 Variable Manufacturing overhead $ 190 Shipping expense $ 55 Contribution $ -