Precision Gauge Corporation produces three gauges. These gauges, which measure density, permeability, and thickness, are known as D-gauges, P-gauges, and T-gauges, respectively. For many years, the company has been profitable and has operated at capacity. In the last two years, however, prices on all gauges were reduced and selling expenses increased to meet competition and to keep the plant operating at full capacity. The following third-quarter results are representative of recent experiences:

Marvin Caplan, president of the company, is concerned about the results of the pricing, selling, and production policies. After reviewing the third quarter results, he announced that he would ask his management staff to consider a course of action that includes the following three suggestions:
(a) Discontinue the T-gauge line immediately. T-gauges will not be returned to the line of products unless the problems with the gauge are identified and resolved.
(b) Increase quarterly sales promotion by $100,000 on the P-gauge product line to increase sales volume 15%.
(c) Cut production on the D-gauge line by 50%, a quantity sufficient to meet the demand of customers who purchase P-gauges. In addition, the traceable advertising and promotion for this line will be cut to $20,000 each quarter.
Joan Garth, who is the controller, suggested that a more careful study of the financial relationships be made to determine the possible effect on the company's operating results as a consequence of the president's proposed course of action. The president agreed, and Tom Kirk, assistant controller, was assigned the analysis. To prepare the analysis, Tom gathered the following information:
(a) All three gauges are manufactured with common equipment and facilities.
(b) The quarterly general selling and administrative expenses of $170,000 are allocated to the three gauge lines in proportion to their dollar sales volume.
(c) Special selling expenses (primarily advertising, promotion, and shipping) are incurred for each gauge as follows:

(e) The unit sales prices for the three products are $90, $200, and $ 180 for the D-gauge, P-gauge, and T-gauge, respectively.
(f) The company is manufacturing at capacity and is selling all the gauges it produces.
Required:
(1) Tom Kirk has suggested that the Precision Gauge Corporation product-line income statement presented for the third quarter of 20A is not suitable for analyzing proposals and making decisions such as the ones suggested by Marvin Caplan.
(a) Explain why the product-line income statement presented is not suitable for analysis and decision making.
(b) Describe an alternative income statement format that is more suitable for analysis and decision making, and explain why it is better.
(2) Using the operating data presented for Precision Gauge Corporation and assuming that the president's proposed course of action had been implemented at the beginning of the third quarter of 20A, evaluate the president's proposed course of action by specifically responding to the following points:
(a) Is each of the three suggestions cost effective? Support your discussion by a differential cost analysis that shows the net impact on income before tax for each of the three suggestions.
(b) Was the president correct in eliminating the T-gauge line? Explain.
(c) Was the president correct in promoting the P-gauge line rather than the D-gauge line? Explain.
(d) Does the proposed course of action make effective use of Precision's capacity?
(3) Are there any non quantitative factors that Precision Gauge Corporation should consider before it considers dropping the T-gauge line? Explain.

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Precision Gauge Corporation Income Statement For Third Quarter, 20A (in thousands) D-gauge P-gauge T-gauge Total $3,400 2.768 (50) S 632 Sales $900 950 $900 $1,600 7701,048 S 552 185370 Gross profit Selling and administrative expenses Income before income tax $130 135 690 Quarterly Advertising and Promotion $100,000 210,000 40,000 Shipping Expense S 4 per unit 10 per unit 10 per unit D-gauge. P-gauge.. gauge D-gauge P-gauge Tgauge $17 20 30 $ 50 60 60 101520 s 31 40 45 Direct labor Fixed factory overhead S77 $131 190