Agnew Manufacturing produces and sells three models of a single product, Standard, Superior, and DeLuxe, in a local market and in a regional market. At the end of the first quarter of the current year, the following income statement (in thousands of dollars) has been prepared. Sales revenue Cost of goods sold Total $16,500 12,160 Local $12,990 Regional $3,510 9,400 2,760 Gross margin $ 4,340 $ 3,590 $ 750 Marketing costs Administrative costs 1,290 642 735 555 495 147 Total marketing and administrative $ 1,932 $ 1,230 $ 702 Operating profits $ 2,408 $ 2,360 $ 48 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 preceding quarterly statement. In attempting to decide whether to eliminate the regional market, the following information has been gathered. Sales revenue Variable manufacturing costs as a percentage of sales revenue Variable marketing costs as a percentage of sales revenue Product Sales by Markets Local Standard $5,130 Regional $1,170 Superior DeLuxe 3,930 3,930 1,170 1,170 Products Standard $6,300 60% Superior $5,100 70% DeLuxe $5,100 60% 3 2 2 All administrative costs and fixed manufacturing costs would not be affected by eliminating the regional market. Marketing costs that are not listed as variable are fixed for the period and separable by market. Fixed marketing costs assigned to the regional market would be saved if that market were eliminated. Required: a. Assuming there are no alternative uses for Agnew's present capacity, would you recommend dropping the regional market? b. Prepare the quarterly income statement showing contribution margins by products. Do not allocate fixed costs to products. c. It is believed that a new model can be ready for sale next year if Agnew decides to go ahead with continued research. The new product would replace DeLuxe and can be produced by simply converting equipment presently used in producing the DeLuxe model. This conversion will increase fixed costs by $123,000 per quarter. What must be the minimum contribution margin per quarter for the new model to make the changeover financially feasible?