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. Second-quarter results for the current year, which follow, typify recent experience. ALBERTA GAUGE COMPANY LTD. Income Statement Second Quarter (in thousands) Q-Gauge Sales $2,120 E-Gauge $1,550 R-Gauge Total $1,420 $5,090 Cost of goods sold 1, 152 900 1,470 3,522 Gross margin $ Selling and administrative expenses Income before taxes 968 396 $ 650 861 $ (50) $1,568 395 1,652 $ 572 $ (211) $ (445) $ (84) Alice Carlo, the company's president, is concerned about the results of the pricing, selling, and production prices. After reviewing the second-quarter results, she asked her management staff to consider the following three suggestions: Discontinue the R-gauge line immediately. R-gauges would not be returned to the product line unless the problems with the gauge can be identified and resolved. Increase quarterly sales promotion by $165,000 on the Q-gauge product line in order to increase sales volume by 0 percent. Cut production on the E-gauge line by 0 percent, and cut the traceable advertising and promotion for this line to $46,000 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: