Renton Tractor Company was formed at the start of 2006 and produces a small garden tractor. The selling price is \(\$ 5,000\), variable production costs are \(\$ 2,000\) per unit, fixed production costs are \(\$ 6,000,000\) per year, and fixed selling and administrative costs are \(\$ 2,000,000\) per year. Data below indicate net income for 2006-2008 under full costing.

In 2006 and 2007, Edward Vendon was the president of Renton Tractor. The board of directors was generally pleased with the company's performance under his leadership-the company hit the break-even point in its first year of operation and had a modest profit in 2007. Edward quit at the end of 2007 and went on to start an e-commerce company selling used cars on the Internet. His replacement, Zac Dalton, was apparently not as successful as Ed. Zac argued that he was improving the company by getting rid of excess inventory, but the board noted that the company showed a \(\$ 2,000,000\) loss in the first year of his leadership.

Required

a. Recalculate net income for all three years using variable costing.

b. Based on the limited information available, comment on the relative job performance of Ed and Zac.

c. Note that under full costing, the company is showing a substantial loss in 2008.
Based on the limited information available, does it appear that the company should get out of the tractor business?

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Production (units) Sales (units) Production cost per unit Sales Less cost of goods sold Gross margin Less selling and administrative expense Net income (loss) 2006 2007 2008 3,000 3,000 1,500 2,000 2,500 3,000 $4,000 $4,000 $6,000 $10,000,000 $12,500,000 $15,000,000 8,000,000 10,000,000 15,000,000 2,000,000 2,000,000 -0- 2,500,000 2,000,000 $ 500,000 -0- 2,000,000 S (2,000,000)