In mid-November 2018, Bob, Paul and Cherry were almost through with the 2018 operating budget for their company, Holstein Corporation. Holstein produced milk products in three primary forms (yogurt, cheese and ice-cream). The industry was dominated by Milksted, Laughingcow, Happycow, and Holstein, which made several of types of milk products. Holstein was a small player in the industry with solid customer base and a profitable business over last few years. This year was a little different their profit was significantly lower than the prior years. The companys proforma financials are provided in Exhibit 1. The company produces 3 products. The standard costs for these three products are provided in Exhibit 2. The selling, general, and administrative (SG&A), other costs, interest income, and interest expense were likely to remain the same no matter which product-line combinations are used by the company. The company hires your services as their consultant. They believe that they can improve their bottom-line (net profits) by changing the product mix, pricing and advertising decisions. (Note: The total production capacity is fixed at 420,000 units). If the company decreases the price of its product, the result would be an increase in the sales of the product; the company provides you the following information on the estimated increase in the sales (based on the research by their sales team).

1. What is the effect of discontinuing yogurt and using that production facility to produce cheese

2. What is the effect of decreasing the price of yogurt? If the decrease in price results in an increase in the sale of yogurt, which product will you ask the management to produce less units of (considering fixed capacity)

3. Calculate the net change in profits if the company focuses more on advertising their ice-cream instead of cheese. Such an action would result in decrease (increase) unit sales of cheese (ice-cream) by 10,000 units.

Please show the formulas so I can see where I have made a mistake. Thank you.

Ice-cream $1.60 25,000 Cheese $1.10 20,000 Yogurt $0.75 12,000 Decrease in Price Increase in sales