Hindt Chocolate Company is interested in acquiring another chocolate maker, Russell Hover Chocolates (RHC). RHC recently filed for bankruptcy. Hindt believes that with their experience in the chocolate industry in Canada they can generate a profit from this bankrupt company. Also, RHC has accounts with all of the drug store chains across Canada, a segment of the market where Hindt is not present.

The following GAAP Income Statement shows the summarized results of RHC for the past year:

Sales	$767,190
Cost of goods sold	689,598
Gross margin	$77,592
Selling and admin. (fixed/common)	98,000
Operating income	$(20,408)

RHC makes two products: chocolate bars and boxed chocolates. They use the absorption method of costing and provided the information below to Hindt. The controller of RHC, when presenting this financial information, suggested that Hindt discontinue the chocolate bar product line after the acquisition. The company uses just-in-time (JIT) to manage inventories and, as a result, beginning and ending inventories are kept near zero (note: at the beginning and end of the prior year, inventories had zero values).

Information provided by RHC:

	Chocolate Bar	Boxed Chocolates
Production	245,000	36,000
Sales price	$1.59	$10.49
Product costs:
Direct materials	$166,600	$230,400
Direct labour	$29,400	$7,200
Variable overhead	$24,500	$4,680

Fixed overhead is applied to both products based on total direct labour dollars at a rate of $6.15 for bars and $6.39 for boxed chocolates.

As part of its due diligence and prior to making the final decision to acquire this company, Hindts finance experts were given access to RHCs detailed financial production data. After reviewing the financial data (provided below) and company operations, Hindt management is certain they can eliminate 40% of RHCs fixed direct manufacturing overhead and 80% of the selling and administrative costs.

Required:

1. Calculate the unit cost of each product as RHC would have, using the absorption costing model. What is a likely reason for RHCs controllers suggestion to eliminate the bars (round to 2 decimal places)?

2. Calculate the contribution margin of each product and prepare a contribution margin income statement (using the format below assuming sales equals production). Your income statement should reveal the overall impact of Hindt managements expected savings resulting from the merger. Would you suggest that the chocolate bars be discontinued under Hindts control?

Russell Hover Chocolates
Restated Segmented Income Statement
For prior year
	Bar	Boxed Chocolates	Total
Sales	$0	$0	$0
Variable costs	0	0	0
Contribution margin	$0	$0	$0
Direct fixed costs	0	0	0
Segment margin	$0	$0	$0
Selling and administrative			0
Operating income			$0