Hazlett Family is organized into two geographic markets Northern and Southern The company makes an off road vehicle for recreation and agricultural use The vehicle is sold in three models, depending on the power and options The three models, from least expensive to most expensive, are the H L, H LX, and H LXS The company's financial staff has prepared the following forecasted income statement for the upcoming fiscal year (in thousands of dollars) Total Northern Southern Sales revenue $ 63,900 $ 47,700 $ 16,200 Cost of goods sold 49,050 36,675 12,375 Gross margin $ 14,850 $ 11,025 $ 3,825 Marketing costs 5,625 3,150 2,475 Administrative costs 2,826 2,250 576 Total marketing and administrative $ 8,451 $ 5,400 $ 3,051 Operating profits $ 6,399 $ 5,625 $ 774 Management has expressed special concern with the Southern market because of the extremely poor return on sales This market was entered a year ago because it seemed like the best opportunity for growth Hazlett Family knew that it would take some time to build profitability in the market, but there has been no noticeable change in the low returns over time The financial staff has also prepared product line information to help the managers of the company decide whether to leave the Southern market Products H L H LX H LXS Sales revenue $ 24,300 $ 19,800 $ 19,800 Variable manufacturing costs as a percentage of sales revenue 50 75 65 Variable marketing costs as a percentage of sales revenue 5 2 3 Sales revenue by market and product are as follows (in thousands of dollars) Northern Southern H L $ 19,800 $ 6,300 H LX 15,300 6,300 H LXS 15,300 6,300 Marketing costs that are not listed as variable are fixed for the period and separable by market Fixed marketing costs assigned to the Southern market would be saved if that market were eliminated Eliminating the Southern market will not affect administrative costs or fixed manufacturing costs Required b Prepare the forecasted annual income statement showing contribution margins by products Do not allocate fixed costs to products (Enter your answers in thousands (i e , 5,400,000 should be entered as 5,400) ) Model H L Model H LX Model H LXS Total Sales revenue Less variable costs Total variable cost 0 0 0 0 Contribution margin 0 0 0 0 Less fixed costs Total fixed costs 0 $0 c It is believed that a new model can be ready for sale next year if Hazlett decides to go ahead with continued research The new product would replace H LX and can be produced by simply converting equipment presently used in producing the H LX model This conversion will increase fixed costs by $486,000 annually What must be the minimum annual contribution margin for the new model to make the changeover financially feasible

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Hazlett & Family is organized into two geographic markets Northern and Southern. The company makes an off-road vehicle for recreation and agricultural use. The vehicle

Hazlett & Family is organized into two geographic markets Northern and Southern. The company makes an off-road vehicle for recreation and agricultural use. The vehicle is sold in three models, depending on the power and options. The three models, from least expensive to most expensive, are the H-L, H-LX, and H-LXS. The company's financial staff has prepared the following forecasted income statement for the upcoming fiscal year (in thousands of dollars):

	Total	Northern	Southern
Sales revenue	$ 63,900	$ 47,700	$ 16,200
Cost of goods sold	49,050	36,675	12,375
Gross margin	$ 14,850	$ 11,025	$ 3,825
Marketing costs	5,625	3,150	2,475
Administrative costs	2,826	2,250	576
Total marketing and administrative	$ 8,451	$ 5,400	$ 3,051
Operating profits	$ 6,399	$ 5,625	$ 774

Management has expressed special concern with the Southern market because of the extremely poor return on sales. This market was entered a year ago because it seemed like the best opportunity for growth. Hazlett & Family knew that it would take some time to build profitability in the market, but there has been no noticeable change in the low returns over time.

The financial staff has also prepared product-line information to help the managers of the company decide whether to leave the Southern market.

	Products
	H-L	H-LX	H-LXS
Sales revenue	$ 24,300	$ 19,800	$ 19,800
Variable manufacturing costs as a percentage of sales revenue	50%	75%	65%
Variable marketing costs as a percentage of sales revenue	5	2	3

Sales revenue by market and product are as follows (in thousands of dollars):

	Northern	Southern
H-L	$ 19,800	$ 6,300
H-LX	15,300	6,300
H-LXS	15,300	6,300

Marketing costs that are not listed as variable are fixed for the period and separable by market. Fixed marketing costs assigned to the Southern market would be saved if that market were eliminated. Eliminating the Southern market will not affect administrative costs or fixed manufacturing costs.

Required:

b. Prepare the forecasted annual income statement showing contribution margins by products. Do not allocate fixed costs to products.

(Enter your answers in thousands. (i.e., 5,400,000 should be entered as 5,400).)

	Model H-L	Model H-LX	Model H-LXS	Total
Sales revenue
Less variable costs:



Total variable cost	0	0	0	0
Contribution margin	0	0	0	0
Less fixed costs:




Total fixed costs				0
				$0

c. It is believed that a new model can be ready for sale next year if Hazlett decides to go ahead with continued research. The new product would replace H-LX and can be produced by simply converting equipment presently used in producing the H-LX model. This conversion will increase fixed costs by $486,000 annually. What must be the minimum annual contribution margin for the new model to make the changeover financially feasible?