Information/Instructions:

1.Case Summary Katy EH Manufacturing Company The owners of Katy EH Manufacturing, a small manufacturer of gas grills, have prepared a preliminary budget for the upcoming year and would like to assess the financial impact of several alternative scenarios, including dropping a product; changing the price on a product, with a resulting increase in volume; and shifting advertising focus, with a resulting shift in volume from one product to another. A new budget must be prepared. At year-end, the actual results are better than had been planned, but not necessarily better than what should have been, given actual sales volumes.

2.Hint Consider using the topic of contribution analysis as an easy way to analyze profit-planning issues such as adding or dropping a product or service; changing a price; adding or decreasing expected volumes; or preparing a profit budget. In this particular situation, there are three products, each with different proportions of variable and fixed costs. Make sure you can identify variable and fix costs. Pay attention to the relation of profit and contribution margin. In addition, you also need to consider non-financial factors prior to make your decision.

Katy EH Manufacturing Company

In mid-December 2015, Peter Johnson and Lily Brown were almost through with the 2016 operating budget for their company, Katy EH Manufacturing Company (EH). EH produced gas grills in three primary models (Grills A, B, and C). The industry was dominated by Lukey, Coleman, Bonnie, Sunshine, and Highland, which together made dozens of types of grills, smokers, and cooking kettles. EH was a small player in the industry, but business had been good, and it was expecting another profitable year. A draft of the companys operating budget is shown in Exhibit 1. Standard costs for the three products are explained in Exhibit 2. 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 the company produced.

Before calling it a day, the two owners asked their assistant, Jane Sharp, to determine the impact of several options on income before tax. They agreed to meet the following day, the Sharp hurried off to look at what these latest ideas would mean. She had six questions to address (see page 1) and was asked to consider each option independent of all other options.

Sharp and the owners met the following morning to review her work. Having finished her duties, she left for an early weekend getaway. She didnt give the budget another thought. Early in January 2017, Sharp prepared a rough draft of the actual 2016 volume, selling price, and financial results (Exhibit 3 & 4). (This case is adopted and modified from Cases in Managerial and Cost Accounting, Cambridge Business Publishers).

Exhibit 1 Katy EH Manufacturing Company Operating Budget 2016: Draft 12/18/2015

Sales $41,200,000 Less: costs of products sold 22,800,000 Gross margin $18,400,000

SG&A 9,350,000 Other costs 2,100,000 Operating income $6,950,000

Less: Interest expense 420,000

Plus: Interest income 150,000

Income before tax $6,680,000 Income taxes 2,338,000 Net income $4,342,000

4

Exhibit 2

Katy EH Manufacturing Company

Operating Budget 2016: Draft 12/18/2015	Grill A	Grill B	GRILLC
Planned units	80,000	120,000	200,000
Per unit
Sales price	$150	$110	$80
Direct costs:
Materials	17	10	7	directly related to volume
Labor	21	16	4	directly related to volume
Subtotal	$38	$26	$11
Indirect cost:
Supplies	7	2	1	directly related to volume
Labor	10	8	4	one-half varies with direct labor, the rest is fixed
Supervision	8	3	1	unrelated to volume
Energy	12	6	4	one-half varies with direct labor, the rest is fixed
Depreciation	22	7	5	unrelated to volume
Support*	12	6	3	unrelated to volume
All other	11	2	1	unrelated to volume
Subtotal	$82	$34	$19
Total cost	$120	$60	$30
Profitability	$30	$50	$50

Exhibit 3

Actual 2016 Volume & Price	Grill A	Grill B
Price	$150	$110	GRILL C $75
Volume	115,000	110,000	225,000

Exhibit 4

Katy EH Manufacturing Company

2016 Operating Results: Draft 1/19/2017Revenue	$46,225,000
Variable costs:
Materials	4,800,000
Direct labor	5,200,000
Supplies	1,300,000
Indirect labor	1,500,000
Energy	1,600,000
Total variable cost	$14,400,000
Fixed costs:
Indirect labor	1,300,000
Supervision	1,200,000
Energy	1,350,000
Depreciation	3,660,000
Support	2,300,000
All other	1,380,000
Total fixed cost	$11,190,000
Total cost	$25,590,000
Gross margin	$20,635,000
SG&A	9,350,000
Other costs	2,100,000
Operating income	$9,185,000
Less: interest expense	420,000
Plus: interest income	150,000
Income before tax	$8,915,000
Income taxes	3,120,250
Net income	$5,794,750

D. Should Katy Eh Lower the price of grill C and change its advertising focus? The owners want to know the impact of lowering the price of grill C to 75.00 dollars and shifting the advertising focus more grill C, Thereby decreasing Grill A volume by 10,000 units and increasing Grill C volume by 30,00 units.