Using a product profitability report to guide strategic decisions The controller of Boom Box Sounds Inc. prepared the following product profitability report for management, using activity-based costing methods for allocating both the factory overhead and the marketing expenses. As such, the controller has confidence in the accuracy of this report.

In addition, the controller interviewed the vice president of marketing, who indicated that the floor loudspeakers were an older product that was highly recognized in the marketplace. The ribbon loudspeakers were a new product that was recently launched. The ribbon loudspeakers are a new technology that have no competition in the marketplace, and it is hoped that they will become an important future addition to the company’s product portfolio. Initial indications are that the product is well received by customers. The controller believes that the manufacturing costs for all three products are in line with expectations.

Floor Bookshelf Ribbon Loudspeakers Loudspeakers Loudspeakers Totals Sales $1,500,000 $1,200,000 $900,000 $3,600,000 Less cost of goods sold 1,050,000 720,000 810,000 2,580,000 _________ _________ _______ _________ Gross profit $ 450,000 $ 480,000 $ 90,000 $1,020,000 Less marketing expenses 600,000 120,000 72,000 792,000 _________ _________ _______ _________ Income from operations $ (150,000) $ 360,000 $ 18,000 $ 228,000 __________ ________ ___________ _______ _______ _______ _________ _________ 1. Calculate the gross profit and income from operations to sales ratios for each product.

2. Write a memo using the product profitability report and the calculations in (1) to make recommendations to management with respect to strategies for the three products.