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 2 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 experience. Alberta Gauge Company Income Statement Second Quarter (In thousands) Q-Gauge E-Gauge R-Gauge Total Sales $1,600 $900 $900 $3,400 Cost of goods sold 1,048 770 950 2,768 Gross Margin $552 $130 $(50) $632 Selling and admin expenses 370 185 135 690 Income before taxes $182 $(55) $(185) $(58) Alice Carlo, the company 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-gauge would not be returned to the product line unless the problems with the gauge can be identified and resolved. Increase quarterly sales promotion by $100,000 on the Q-gauge product line in order to increase sales volume by 15 percent. Cut production on the E-gauge line by 50 percent, and cut the traceable advertising and promotion for this line to $20,000 each quarter. Jason Sperry, the controller, suggested a more careful study of the financial relationships to determine the possible effects on the companys operating results of the presidents 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 expenses 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: Quarterly Advertising and Promotion Q-Gauge $210,000 E-Gauge 100,000 R-Gauge 40,000 The unit manufacturing costs for the three products are as follows: Q-Gauge E-Gauge R-Gauge Direct Material $31 $17 $50 Direct Labor 40 20 60 Variable Manufacturing overhead 45 30 60 Fixed Manufacturing overhead 15 10 20 Total $131 $77 $190 The unit sales prices for the three products are as follows: Q-Gauge $200 E-Gauge 90 R-Gauge 180 The company is manufacturing at capacity and is selling all the gauges it produces. Required: 1. Use the operating data presented for Alberta Gauge Company and assume that the presidents proposed course of action had been implemented at the beginning of the second quarter. Then evaluate the presidents proposal by specifically responding to the following points. a. Are each of the three suggestions cost effective? Support your discussion with an analysis that shows the net impact on income before taxes for each of the three suggestions. b. Was the president correct in proposing that the R-gauge line be eliminated? Explain your answer. c. Was the president correct in promoting the Q-gauge line rather than the E-gauge line? Explain your answer. d. Does the proposed course of action make effective use of the companys capacity? Explain your