Integrative Case 5-72 (Algo) Cost Estimation, CVP Analysis, and Decision Making (LO 5-4, 5,9) Luke Corporation produces a variety of products, each within their own division. Last year, the managers at Luke developed and began marketing a new chewing gum, Bubbs, to sell in vending machines. The product, which sells for $5.50 per case, has not had the market success that managers expected and the company is considering dropping Bubbs. The product-line Income statement for the past 12 months follows: $ 14,689,650 Revenue Costs Manufacturing costs Allocated corporate costs (25%) Product line margin Allowance for tax (@20%) Product-line profit (loss) $ 14,442,895 734,483 $ 15,177,378 (487,728) 97,545 (390,183) $ All products at Luke receive an allocation of corporate overhead costs, which is computed as 5 percent of product revenue. The 5 percent rate is computed based on the most recent year's corporate cost as a percentage of revenue. Data on corporate costs and revenues for the past two years follow: Most recent year Previous year Corporate Revenue $ 111,750,000 76,700, eee Corporate Overhead Costs $ 5,587,500 4,815, 4ee Roy O. Andre, the product manager for Bubbs, is concerned about whether the product will be dropped by the company and has employed you as a financial consultant to help with some analysis. In addition to the Information given, Mr. Andre provides you with the following data on product costs for Bubbs: Month 1 2 3 4 5 6 7 8 9 10 11 Cases 212,090 219,789 217,480 233,ese 244,980 242,000 222,780 249,790 241,380 255,190 252,780 261,700 Production Costs $1,149,328 1,170,828 1,179,481 1,195,023 1,197, 327 1,218, 173 1, 193, 199 1,236, 274 1,234,726 1,246,825 1,251,260 1,281,951 12 Required: a. Bunk Stores has requested a quote for a special order of Bubbs. This order would not be subject to any corporate allocation (and would not affect corporate costs). What is the minimum price Mr. Andre can offer Bunk without reducing profit any further? b. How many cases of Bubbs does Luke have to sell in order to break even on the product? c. Suppose Luke has a requirement that all products have to earn 5 percent of sales (after tax and corporate allocations) or they will be dropped. How many cases of Bubbs does Mr. Andre need to sell to avoid seeing Bubbs dropped? d. Assume all costs and prices will be the same in the next year. If Luke drops Bubbs, how much will Luke's profits Increase or decrease? Assume that fixed production costs can be avolded if Bubbs is dropped. Required A Required B Required c Required D Bunk Stores has requested a quote for a special order of Bubbs. This order would not be subject to any corporate allocation (and would not affect corporate costs). What is the minimum price Mr. Andre can offer Bunk without reducing profit any further? (Round your answer to 2 decimal places.(i.e., 32.21)) Minimum price per case Required Required B > Required A Required B Required c Required D Suppose Luke has a requirement that all products have to earn 5 percent of sales (after tax and corporate allocations) or they will be dropped. How many cases of Bubbs does Mr. Andre need to sell to avoid seeing Bubbs dropped? (Round your minimum price per case to 2 decimal places and do not round your other intermediate calculations. Round your final answer up to the nearest whole unit.) Show less Number of cases Required A Required B Required Required D Assume all costs and prices will be the same in the next year. If Luke drops Bubbs, how much will Luke's profits increase or decrease? Assume that fixed production costs can be avoided if Bubbs is dropped. (Use variable cost percentage to 2 decimal places. Round intermediate calculations and final answer to nearest whole dollar amount.) Profits Required A Required B Required c Required D Suppose Luke has a requirement that all products have to earn 5 percent of sales (after tax and corporate allocations) or they will be dropped. How many cases of Bubbs does Mr. Andre need to sell to avoid seeing Bubbs dropped? (Round your minimum price per case to 2 decimal places and do not round your other intermediate calculations. Round your final answer up to the nearest whole unit.) Show less Number of cases Required A Required B Required Required D Assume all costs and prices will be the same in the next year. If Luke drops Bubbs, how much will Luke's profits increase or decrease? Assume that fixed production costs can be avoided if Bubbs is dropped. (Use variable cost percentage to 2 decimal places. Round intermediate calculations and final answer to nearest whole dollar amount.) Profits
