Case 14-63 Drop a Product Line (LO 14.4, 14-5) 7 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. 1.04 points 03:37:31 eBook ALBERTA GAUGE COMPANY, LTD. Income Statement Second Quarter (in thousands) Q-Gauge E-Gauge Sales $1,880 $1,250 Cost of goods sold 1,104 840 Gross margin $ 776 $ 410 Selling and administrative expenses 384 549 Income before taxes $ 392 $ (139) References R-Gauge $1,180 1,230 $ (50) 275 $ (325) Total $4,310 3,174 $1,136 1,208 $ (72) 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 $135,000 on the Q-gauge product line in order to increase sales volume by 0 percent. Cut production on the E-gauge line by O percent, and cut the traceable advertising and promotion for this line to $34,000 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: . Q-gauge E-gauge R-gauge Quarterly Advertising and Promotion $245,000 135,000 180,000 Shipping Expenses $24 per unit 18 per unit 24 per unit The unit manufacturing costs for the three products are as follows: Direct material Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total Q-Gauge $ 31.00 40.00 45.00 22.00 $138.00 E-Gauge $17.00 20.00 30.00 17.00 $84.00 R-Gauge $ 64.00 74.00 74.00 34.00 $246.00 The unit sales prices for the three products are as follows: Q-gauge E-gauge R-gauge $235 125 236 The company is manufacturing at capacity and is selling all the gauges it produces. Req 2A Reg 2B1 Reg 2B2 Req 2C1 Req 202 Calculate the net impact on income before taxes for each of the three suggestions. E-Gauge Q-Gauge R-Gauge Increase (decrease) in segment contribution Req 2A Req 2B1 Req 2B2 Req 2C1 Req 202 Calculate contribution margin for R-gauge. Contribution margin Req 2A Req 2B1 Req 2B2 Req 2C1 Req 202 Was the president correct in proposing that the R-gauge line be eliminated? Yes No Req 2A Req 2B1 Reg 2B2 Reg 2C1 Reg 202 Calculate the contribution per direct-labor dollar for Q-gauge and E-gauge. (Round your answers to 2 decimal places.) E-Gauge Q-Gauge Contribution per direct-labor dollar Req 2A Req 2B1 Req 2B2 Req 2C1 Req 202 Was the president correct in promoting the Q-gauge line rather than the E-gauge line? OYes No Case 14-63 Drop a Product Line (LO 14.4, 14-5) 7 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. 1.04 points 03:37:31 eBook ALBERTA GAUGE COMPANY, LTD. Income Statement Second Quarter (in thousands) Q-Gauge E-Gauge Sales $1,880 $1,250 Cost of goods sold 1,104 840 Gross margin $ 776 $ 410 Selling and administrative expenses 384 549 Income before taxes $ 392 $ (139) References R-Gauge $1,180 1,230 $ (50) 275 $ (325) Total $4,310 3,174 $1,136 1,208 $ (72) 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 $135,000 on the Q-gauge product line in order to increase sales volume by 0 percent. Cut production on the E-gauge line by O percent, and cut the traceable advertising and promotion for this line to $34,000 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: . Q-gauge E-gauge R-gauge Quarterly Advertising and Promotion $245,000 135,000 180,000 Shipping Expenses $24 per unit 18 per unit 24 per unit The unit manufacturing costs for the three products are as follows: Direct material Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total Q-Gauge $ 31.00 40.00 45.00 22.00 $138.00 E-Gauge $17.00 20.00 30.00 17.00 $84.00 R-Gauge $ 64.00 74.00 74.00 34.00 $246.00 The unit sales prices for the three products are as follows: Q-gauge E-gauge R-gauge $235 125 236 The company is manufacturing at capacity and is selling all the gauges it produces. Req 2A Reg 2B1 Reg 2B2 Req 2C1 Req 202 Calculate the net impact on income before taxes for each of the three suggestions. E-Gauge Q-Gauge R-Gauge Increase (decrease) in segment contribution Req 2A Req 2B1 Req 2B2 Req 2C1 Req 202 Calculate contribution margin for R-gauge. Contribution margin Req 2A Req 2B1 Req 2B2 Req 2C1 Req 202 Was the president correct in proposing that the R-gauge line be eliminated? Yes No Req 2A Req 2B1 Reg 2B2 Reg 2C1 Reg 202 Calculate the contribution per direct-labor dollar for Q-gauge and E-gauge. (Round your answers to 2 decimal places.) E-Gauge Q-Gauge Contribution per direct-labor dollar Req 2A Req 2B1 Req 2B2 Req 2C1 Req 202 Was the president correct in promoting the Q-gauge line rather than the E-gauge line? OYes No