5 Problem 4-65 (Algo) Decision Whether to Add or Drop (LO 4-4) 2.85 points Hazlett & Family is organized into two geographic markets Northern and Southern. The company makes an off-road vehicle for recreation and agricultural use. The vehicle is sold in three models, depending on the power and options. The three models, from least expensive to most expensive, are the H-L, H-LX, and H-LXS. The company's financial staff has prepared the following forecasted income statement for the upcoming fiscal year (in thousands of dollars): Sales revenue Cost of goods sold eBook Gross margin Marketing costs Administrative costs Total marketing and administrative Print Operating profits References Total $ 61,500 47,450 $ 14,050 5,225 2,610 $ 7,835 $ 6,215 Northern $ 46,500 35,875 $ 10,625 2,950 2,050 $ 5,000 $ 5,625 Southern $ 15,000 11,575 $ 3,425 2,275 560 $ 2,835 $ 590 Management has expressed special concern with the Southern market because of the extremely poor return on sales. This market was entered a year ago because it seemed like the best opportunity for growth. Hazlett & Family knew that it would take some time to build profitability in the market, but there has been no noticeable change in the low returns over time. The financial staff has also prepared product-line information to help the managers of the company decide whether to leave the Southern market. Sales revenue Variable manufacturing costs as a percentage of sales revenue Variable marketing costs as a percentage of sales revenue Sales revenue by market and product are as follows (in thousands of dollars): B-L H-LX Northern Southern $ 19,000 14,500 $ 5,500 5,500 14,500 Products H-L H-LX H-LXS $ 23,500 $ 19,000 $ 19,000 50% 75% 65% 5 2 3 H-LXS 5,500 Marketing costs that are not listed as variable are fixed for the period and separable by market. Fixed marketing costs assigned to the Southern market would be saved if that market were eliminated. Eliminating the Southern market will not affect administrative costs or fixed manufacturing costs.