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Case 1 4 - 6 3 Drop a Product Line ( LO 1 4 - 4 , 1 4 - 5 ) Alberta Gauge Company,
Case Drop a Product Line LO 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.ALBERTA GAUGE COMPANY, LTDIncome StatementSecond Quarter in thousandsQGaugeEGaugeRGaugeTotalSales$$$ $Cost of goods soldGross margin$$ $Selling and administrative expensesIncome before taxes$$ $ $Alice Carlo, the company's president, is concerned about the results of the pricing, selling, and production prices. After reviewing the secondquarter results, she asked her management staff to consider the following three suggestions: Discontinue the Rgauge line immediately. Rgauges would not be returned to the product line unless the problems with the gauge can be identified and resolved. Increase quarterly sales promotion by $ on the Qgauge product line in order to increase sales volume by percent. Cut production on the Egauge line by percent, and cut the traceable advertising and promotion for this line to $ each quarter.Jason Sperry, the controller, suggested a more careful study of the financial relationships to determine the possible effects on the company's operating results of the president's proposed course of action. The president agreed and assigned JoAnn Brower, the assistant controller, to prepare an analysis. Brower has gathered the following information. All three gauges are manufactured with common equipment and facilities. The selling and administrative expense is allocated to the three gauge lines based on average sales volume over the past three years. Special selling expenses primarily advertising, promotion, and shipping are incurred for each gauge as follows:Quarterly Advertising and PromotionShipping ExpensesQgauge$$ per unitEgauge per unitRgauge per unit The unit manufacturing costs for the three products are as follows:Direct materialQGaugeEGaugeRGauge$ $$ Direct laborVariable manufacturing overheadFixed manufacturing overheadTotal$$$ The unit sales prices for the three products are as follows:Qgauge$EgaugeRgauge 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 beenimplemented 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?
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