Case 14-63 Drop a Product Line (! LO 14-4, ! 14-5)> Alberta Gauge Company;, Ltd, a small manufactuning company in Caleary. Alberta, manufactures three types of electrical gupess used in a variety of machinery. For many years the company has been profiteble and has operated at capacity. However, in the last two years, prices on all gauges were reduced and selliog expenses increased to mect competition and keep the plant operating at cepacity Secondquarter tesults for the current year, which follow, typify recent experience Alice Carlo, the company's president, is concerned about the resalts of the pricing, selling, and production prices. After reviewing the second-quarter results, she atked ber menagement staff to consider the following three susgestions: be identified and resolved - Increase quartethy sales promotion by $100,000 on the Q-saugo product line in order to increase sales volume by 15 pereent - Cut production on the E-gaupe line by 50 pereent, and cut the traceable advertiring and promotion for this line to $20,000 each quarter. Jason Spetry, the controller, sugeested e more careful study of the financial relationships to determine the possible eflects on Page 665 the company's openeting repalts of the president's proposed congse of action. The president agreed and assigned Jontnn Brower, the assitant controller, to prepare an analyis Brower has gethered the following information - All thrce gauges are manufactured with common equipment abd facilities - The selling and administrative expense is allocated to the three gauge lines based on average salea volume over the pest three years - Special selling expentes (primanly advertiring, promotion, and thipping) ere incurred for cach peuge as followa - The unit manufacturing costs for the urec producta are at follown: - The unit saleu prices for tne unree prouucts are as touow: - The company is maanfacturing at eapacity and is selling all the eavees it produces. Required: 1. JoAnn Brower nays that Alberta Gauge Company's productline income statement for the second quarter is not suitable for analyzing proposals and makine decisions such as the oner sugpested by Atice Carlo. Write a memo to Alberta Gauge's presideat that addresses the following points a. Explein why the prodact-line income statement as presented is not suitable for analysis and decision makine b. Describe an alternative incomestatement format that would be more siitable for enalssis and decision moking and explain why it is better 2. Use the operating data presented for Alberta Gauge Company end assume that the president's proposed course of action had been implemented at the beeinning of the gecond guarter. Then cvaluate the president s propotal by cpecifically responding to the following points a. Are each of the three suggestions cost effective? Support jour discussion with an analyais that shows the net impact on income before texes for each of the three suggertions b. Was the presideat correct in proporing that the R-finge line be eliminated? Explain jour answer c. Was the prerident correct in promoting the Qsage lige rather than the E-gauge liae? Explain your answer d. Does the proposed course of action make effective use of the compaey's capacity? Explain your answer 3. Are there any qualitative fuctors that Alberta Gauge Company's managenent should consider before it dropa the R-pauge line? Explain your answer. Case 14-63 Drop a Product Line (! LO 14-4, !] 14-5)> 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. 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 $100,000 on the Q-gauge product line in order to increase sales volume by 15 pereent. - Cut production on the E-gauge line by 50 percent, and cut the traceable advertising and promotion for this tine 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 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 analygis. 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 cach gauge as follows: - The unit manufacturing costs for the three products are as follows: - The unit sales prices for the three products are as follows: - The company is manufacturing at capacity and is selling all the gauges it produces. Required: 1. JoAnn Brower says that Alberta Gauge Compeny's product-line income statement for the second quarter is not suitable for analyzing proposals and making decisions such as the ones suggested by Alice Carlo. Write a memo to Alberta Gauge's president that addresses the following points. a. Explain why the product-line income statement as presented is not suitabie for enalysis and decision making. b. Deseribe an alternative income-statement format that would be more suitable for analyzis and decision making, and explain why it is better. 2. Use the operating data presented for Alberta Gauge Company and assume that the president's proposed course of action had been implemented at the beginning of the second quarter. Then evaluate the president's 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 impset on income before texes for each of the three suggestions. 5. Was the president correct in proposing that the R-gauge line be eliminated? Explain jour answer. c. W8s the president correct in promoting the Q-sauge line rather than the E-gauge line? Explain your answer. d. Does the proposed course of action make effective use of the company's capacity? Explain your answer. 3. Are there any qualitative factors that Alberta Gauge Company's management should consider before it drops the R-gauge line? Explain your