Contribution Approach to Production Decisions}

The officers of Bradshaw Company are reviewing the profitability of the company's four products and the potential effect of several proposals for varying the product mix. An excerpt from the income statement and other data follow:

{Required:}
Each of the following proposals is to be considered independently of the other proposals. Consider only the product changes stated in each proposal; the activity of other products remains stable. Ignore income taxes.

(a) If Product \(R\) is discontinued, what will be the effect on net income?

(b) If Product \(\mathrm{R}\) is discontinued and a resulting loss of customers causes a decrease of 200 units in sales of \(\mathrm{Q}\), what will be the total effect on net income?

(c) If the sales price of \(\mathrm{R}\) is increased to \(\$ 8\) with a decrease in the number of units sold to 1,500 , what will be the affect on net income?

(d) The plant in which \(\mathrm{R}\) is produced can be utilized to produce a new product, T. The total variable costs and expenses per unit of \(T\) are \(\$ 8.05\), and 1,600 units can be sold at \(\$ 9.50\) each. If \(T\) is introduced and \(\mathrm{R}\) is discontinued, what will be the effect on net income?

(e) Part of the plant in which \(\mathrm{P}\) is produced can easily be adapted to the production of \(\mathrm{S}\), but changes in quantities may make changes in sales prices advisable. If production of \(\mathrm{P}\) is reduced to 500 units (to be sold at \(\$ 12\) each) and production of \(S\) is increased to 2,500 units (to be sold at \(\$ 10.50\) each), what is the effect on net income?

(f) Production of \(\mathrm{P}\) can be doubled by adding a second shift, but higher wages must be paid, increasing variable manufacturing costs to \(\$ 3.50\) for each of the additional units. If the 1,000 additional units of \(\mathrm{P}\) can be sold at \(\$ 10\) each, what is the effect on net income?

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Totals Product P Product Q Product R Product S Sales Cost of goods sold... Gross profit.......... Operating expenses... $62,600 $10,000 $18,000 $12,600 $22,000 $44,274 $4,750 $ 7,056 $13,968 $18,500 $18,326 $ 5,250 $10,944 ($1,368) $ 3,500 $12,012 $ 1,990 $ 2,976 $ 2,826 $ 4,220 Income before income taxes... $6,314 $3,260 $ 7,968 ($4.194) ($ 720) Units sold............. 1,000 1,200 1,800 2,000 Sales price per unit.. $10.00 $15.00 $ 7.00 $11.00 Variable manufacturing costs per unit....... $ 2.50 $ 3.00 $ 6.50 $ 6.00 Variable selling expenses per unit $ 1.17 $ 1.25 $ 1.00 $ 1.20