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 Total Local Regional Sales revenue $ 18,000 $ 14,640 $ 3,360 Cost of goods sold 12,360 9,800 2,560 Gross margin $ 5,640 $ 4,840 $ 800 Marketing costs 1,340 760 580 Administrative costs 672 520 152 Total marketing and administrative $ 2,012 $ 1,280 $ 732 Operating profits $ 3,628 $ 3,560 $ 68 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 Products Standard Superior DeLuxe Sales revenue $ 6,800 $ 5,600 $ 5,600 Variable manufacturing costs as a percentage of sales revenue 60 70 60 Variable marketing costs as a percentage of sales revenue 4 3 3 Product Sales by Markets Local Regional Standard $ 5,680 $ 1,120 Superior 4,480 1,120 DeLuxe 4,480 1,120 All administrative costs and fixed manufacturing costs would not be affected by eliminating the regional market Marketing costs that are not listed above 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 Yes No b Prepare the quarterly income statement showing contribution margins by products Do not allocate fixed costs to products (Enter your answer in thousands of dollars ) Model Standard Model Superior Model DeLuxe Total Sales revenue Less variable costs Manufacturing Marketing Total variable costs Contribution margin Less fixed costs Manufacturing Marketing Administrative Total fixed costs Operating Profit 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 $128,000 per quarter What must be the minimum contribution margin per quarter for the new model to make the changeover financially feasible (Enter your answer in thousands of dollars )

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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

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:

	Total		Local		Regional
Sales revenue	$	18,000	$	14,640	$	3,360
Cost of goods sold		12,360		9,800		2,560
Gross margin	$	5,640	$	4,840	$	800
Marketing costs		1,340		760		580
Administrative costs		672		520		152
Total marketing and administrative	$	2,012	$	1,280	$	732
Operating profits	$	3,628	$	3,560	$	68

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:

	Products
	Standard			Superior			DeLuxe
Sales revenue	$	6,800		$	5,600		$	5,600
Variable manufacturing costs as a percentage of sales revenue		60	%		70	%		60	%
Variable marketing costs as a percentage of sales revenue		4			3			3

Product Sales by Markets	Local		Regional
Standard	$	5,680	$	1,120
Superior		4,480		1,120
DeLuxe		4,480		1,120

All administrative costs and fixed manufacturing costs would not be affected by eliminating the regional market. Marketing costs that are not listed above 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?

	Yes
	No

b. Prepare the quarterly income statement showing contribution margins by products. Do not allocate fixed costs to products. (Enter your answer in thousands of dollars.)

	Model Standard	Model Superior	Model DeLuxe	Total
Sales revenue
Less: variable costs
Manufacturing
Marketing
Total variable costs
Contribution margin
Less: fixed costs
Manufacturing
Marketing
Administrative
Total fixed costs
Operating Profit

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 $128,000 per quarter. What must be the minimum contribution margin per quarter for the new model to make the changeover financially feasible? (Enter your answer in thousands of dollars.)