7.27 The Justa Corporation produces and sells three products. The three products, A, B, and Care 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: h27 Sales Cost of goods sold Gross margin Selling expenses Administrative expenses Total Net income Total $1,300,000 1,010,000 $ 290,000 $ 105,000 52.000 $ 157,000 $ 133.000 Local $1,000,000 775,000 $ 225,000 60,000 40,000 100.000 125.000 Regional $300,000 235.000 $ 65,000 $ 45.000 12.000 $ 57,000 8.00 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 noticeable 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 informa- tion has been gathered: A $500,000 Products B $400,000 $400,000 Sales Variable manufacturing expenses as a percentage of sales Variable selling expenses as a percentage of sales 60% 70% 60% 3% 2% 2% Product A B Sales by Markets Local Regional $400.000 $100.000 300,000 100,000 300.000 100,000 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 on a prorated yearly amount. 4 1. Prepare the quarter showing tion margins by markets. 2. Assuming there are no alternative uses for the Justa Corporation's present capacity, would you recommend dropping the regional market? Why or why not? 3. Prepare the quarterly income statement showing contribution margins by products. It is believed that 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 change-over financially feasible