ATC 6-1 (Algo) Business Application Case: Analyzing inventory reductions at Furst, Inc.

Furst, Inc. believed it could increase the companys profits by eliminating some product-lines. Other companies have also tried to improve their financial performance by downsizing. In November 2017, General Electric announced it would begin a downsizing operation that would result in their exiting businesses using over $20 billion in assets in the next one to two years. In January 2018, Newell Brands, the company whose products include Tupperware, Sharpie pens, Elmers Glue, and Rawlings sports products, announced it would be reducing its product offerings to the extent that it would close half of its facilities and reduce its revenues by 20 percent. Consider the additional information presented as follows, which is hypothetical. All dollar amounts are in thousands, unit amounts are not. Assume that Furst decides to eliminate one shampoo product-line, Luster, for one of its segments that currently produces three products. As a result, the following are expected to occur:

1. (1) The number of units sold for the segment is expected to drop by only 205,000 because of the elimination of Luster, since most customers are expected to purchase a Anagen or Catagen product instead. The shift of sales from Luster to Anagen and Catagen is expected to be evenly split. In other words, the sales of Anagen and Catagen will each increase by 35,000 units.

   (2) Rent is paid for the entire production facility, and the space used by Luster cannot be sublet.

   (3) Utilities costs are expected to be reduced by $58,000.

   (4) All of the supervisors for Luster were all terminated. No new supervisors will be hired for Anagen or Catagen.

   (5) Half of the equipment being used to produce Luster is also used to produce the other two products and its depreciation cost must be absorbed by them. The remaining equipment has a remaining a book-value of $420,000 and can be sold for only $140,000.

   (6) Facility-level costs will continue to be allocated between the product lines based on the number of units produced.

Product-Line Earnings Statements
(Dollar amounts are in thousands)
Annual Costs of Operating Each Product Line	Anagen				Catagen				Luster					Total
Sales in units		550,000				550,000				275,000				1,375,000
Sales in dollars	$	1,100,000			$	1,100,000			$	550,000			$	2,750,000
Unit-level costs:
Cost of production		104,500				104,500				56,100				265,100
Sales commissions		14,300				14,300				6,800				35,400
Shipping and handling		24,750				22,000				11,000				57,750
Miscellaneous		8,250				5,500				3,500				17,250
Total unit-level costs		151,800				146,300				77,400				375,500
Product-level costs:
Supervisors' salaries		11,000				9,000				2,750				22,750
Facility-level costs:
Rent		119,000				119,000				59,000				297,000
Utilities		137,500				137,500				68,750				343,750
Depreciation on equipment		491,000				491,000				238,000				1,220,000
Allocated company-wide expenses		27,500				27,500				13,750				68,750
Total facility-level costs		775,000				775,000				379,500				1,929,500
Total product cost		937,800				930,300				459,650				2,327,750
Profit on products	$	162,200			$	169,700			$	90,350			$	422,250

Required Prepare revised product-line earnings statements based on the elimination of Luster. (Hint: It will be necessary to calculate some per-unit data to accomplish this.) (Enter your answers in thousands. Do not round intermediate calculations. Enter all amounts as positive values.)

Required Prepare revised product-line earnings statements based on the elimination of Luster. (Hint. It will be necessary to calculate some per- unit data to accomplish this.) (Enter your answers in thousands. Do not round intermediate calculations. Enter all amounts as positive values.) Totals Revised Product-line Earnings Statements Annual Costs of Operating Each Product Line Anagen Catagen Sales in units Sales in dollars Unit-level costs: 0 $ 0 0 0 0 0 0 Total unit-level costs 0 Product-level costs: 0 0 Facility-level costs: 0 0 0 0 $ 0 0 Total facility-level costs Total product cost 0 0 Profit on products Sale of Luster equipment Segment earnings $ 0 Required Prepare revised product-line earnings statements based on the elimination of Luster. (Hint. It will be necessary to calculate some per- unit data to accomplish this.) (Enter your answers in thousands. Do not round intermediate calculations. Enter all amounts as positive values.) Totals Revised Product-line Earnings Statements Annual Costs of Operating Each Product Line Anagen Catagen Sales in units Sales in dollars Unit-level costs: 0 $ 0 0 0 0 0 0 Total unit-level costs 0 Product-level costs: 0 0 Facility-level costs: 0 0 0 0 $ 0 0 Total facility-level costs Total product cost 0 0 Profit on products Sale of Luster equipment Segment earnings $ 0