Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Alberta Gauge Company, Ltd . , a small manufacturing company in Calgary, Alberta, manufactures three types of electrical gauges used in a variety of machinery.
Alberta Gauge Company, Ltd a small manufacturing company in Calgary, Alberta, manufactures three types of electrical gauges used
in a variety of machinery. For many years the company has been profitable and has operated at capacity. However, in the last two
years, prices on all gauges were reduced and selling expenses increased to meet competition and keep the plant operating at
capacity. Secondquarter results for the current year, which follow, typify recent experience.
Alice Carlo, the company's president, is concerned about the results of the pricing, selling, and production prices. After reviewing the
secondquarter results, she asked her management staff to consider the following three suggestions:
Discontinue the Rgauge line immediately. Rgauges would not be returned to the product line unless the problems with the gauge
can be identified and resolved.
Increase quarterly sales promotion by $ on the gauge product line in order to increase sales volume by percent.
Cut production on the Egauge line by percent, and cut the traceable advertising and promotion for this line to $ each
quarter.
Jason Sperry, the controller, suggested a more careful study of the financial relationships to determine the possible effects on the
company's operating results of the president's proposed course of action. The president agreed and assigned JoAnn Brower, the
assistant controller, to prepare an analysis. Brower has gathered the following information.
All three gauges are manufactured with common equipment and facilities.
The selling and administrative expense is allocated to the three gauge lines based on average sales volume over the past three
years.
Special selling expenses primarily advertising, promotion, and shipping are incurred for each gauge as follows:
The unit manufacturing costs for the three products are as follows:
The unit sales prices for the three products are as follows:
The company is manufacturing at capacity and is selling all the gauges it produces.
Required:
Use the operating data presented for Alberta Gauge Company and assume that the president's proposed course of action had been
implemented at the beginning of the second quarter.
a Calculate the net impact on income before taxes for each of the three suggestions.
b Calculate contribution margin for Rgauge.
b Was the president correct in proposing that the Rgauge line be eliminated?
c Calculate the contribution per directlabor dollar for Qgauge and Egauge.
c Was the president correct in promoting the Qgauge line rather than the Egauge line?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started