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 $ 15,300 $ 11,790 $ 3,510 Cost of goods sold 12,105 9,315 2,790 Gross margin $ 3,195 $ 2,475 $ 720 Marketing costs 1,230 705 525 Administrative costs 606 465 141 Total marketing and administrative $ 1,836 $ 1,170 $ 666 Operating profits $ 1,359 $ 1,305 $ 54 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 $ 5,900 $ 4,700 $ 4,700 Variable manufacturing costs as a percentage of sales revenue 60 70 60 Variable marketing costs as a percentage of sales revenue 2 2 2 Product Sales by Markets Local Regional Standard $ 4,730 $ 1,170 Superior 3,530 1,170 DeLuxe 3,530 1,170 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 $117,000 per quarter What must be the minimum contribution margin per quarter for the new model to make the changeover financially feasible

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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	$	15,300	$	11,790	$	3,510
Cost of goods sold		12,105		9,315		2,790
Gross margin	$	3,195	$	2,475	$	720
Marketing costs		1,230		705		525
Administrative costs		606		465		141
Total marketing and administrative	$	1,836	$	1,170	$	666
Operating profits	$	1,359	$	1,305	$	54

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	$	5,900		$	4,700		$	4,700
Variable manufacturing costs as a percentage of sales revenue		60	%		70	%		60	%
Variable marketing costs as a percentage of sales revenue		2			2			2

Product Sales by Markets	Local		Regional
Standard	$	4,730	$	1,170
Superior		3,530		1,170
DeLuxe		3,530		1,170

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 $117,000 per quarter. What must be the minimum contribution margin per quarter for the new model to make the changeover financially feasible?