The Justa Corporation produces and sells three products. The three products: A, B, and \(\mathrm{C}\), are sold in a local market and in a regional market. At the end of the first quarter of the current year, the following income statement has been prepared:

Management has expressed special concern with the regional market because of the extremely poor return on sales. This market was entered a year ago because of excess capacity. It was originally believed that the return on sales would improve with time, but after a year no noticable improvement can be seen from the results as reported in the above quarterly statement.In attempting to decide whether to eliminate the regional market, the following information has been gathered:

All administrative expenses and fixed manufacturing expenses are common to the three products and the two markets and are fixed for the period. Remaining selling expenses are fixed for the period and separable by market. All fixed expenses are based upon a prorated yearly amount.
{Required:}

(a) Prepare the quarterly income statement showing contribution margins by markets.

(b) Assuming there are no alternative uses for the Justa Corporation's present capacity, would you recommend dropping the regional market? Why or why not?

(c) Prepare the quarterly income statement showing contribution margins by products.

(d) It is believed that a new product can be ready for sale next year if the Justa Corporation decides to go ahead with continued research. The new product can be produced by simply converting equipment presently used in producing Product C. This conversion will increase fixed costs by \(\$ 10,000\) per quarter. What must be the minimum contribution margin per quarter for the new product to make the changeover financially feasible?

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Sales...... Cost of goods sold Gross margin........... Selling expenses. Administrative expenses..... Total $1,300,000 Local $1,000,000 Regional $300,000 1,010,000 775.000 235,000 $ 290,000 $ 225.000 $ 65,000 $ 105,000 $ 60,000 $ 45,000 52,000 40,000 12,000 $ 157,000 $ 100,000 $ 57,000 Net income. .............. 133,000 $ 125,000 $ 8,000