Linden Manufacturing Limited

The president of Linden Manufacturing Limited $($Linden$)$ was concerned about the company's $2016$

operating results $($Exhibit A$).$ Net income before taxes was almost $$50,000$ less than that for $2015.$ He was

particularly upset by the reported loss of the Eastern Division. It had always reported a healthy profit in the

past.

Linden had been a well$-$established family business which manufactured a plastic product called Protea. In

$2003,$ the business went public and also acquired a similar manufacturing business in Western Canada

which produced a plastic product called Primross. Since that time, the company has operated two

manufacturing divisions: the Eastern Division $($consisting of the original family business$)$ and the Western

Division $($consisting of the newly acquired business$).$ The Eastern Division continued to manufacture

Protea while the Western Division manufactured Primross.

Linden used a standard costing system and, during $2016,$ the actual manufacturing costs closely reflected

standard costs. The division managers received bonuses based on divisional ROI with the minimum

required ROI being $15\%.$ The Eastern Division manager had recently complained to the president that this

system was not fair since he had no control over the sales of Protea.

All sales were made through two sales departments in the corporate head office: the domestic sales

department and the foreign sales department. Each sales department manager was paid a commission based

on his department's total sales dollars. The standard pricing policy used was total production cost per unit

plus $75\%.$ This pricing policy had proved to be competitive in the domestic market. The foreign market for

the Protea plastic product, however, had become increasingly competitive over the past few years and the

foreign sales department was forced to decrease the price of Protea significantly in order to maximize total

foreign sales dollars. The Primross plastic product sold well in both domestic and foreign markets.

In the operating statements, the fixed selling costs of the two sales departments were allocated to the Eastern

and Western divisions in proportion to units sales. During $2016,$ the older, less efficient Eastern Division

operated at near capacity, while the newer Western Division operated at about $70\%$ of capacity.

The president of Linden had hired a consultant, Mark MacKay, CPA, to analyze the $2016$ operating results

and to make recommendations regarding future operations. The president requested Mark to provide a detailed analysis and explanation of the Eastern Division's reported loss and to recommend whether any part

of Linden's operation should be discontinued to improve corporate profit. He also wanted a general

assessment of the management planning and control system, including pricing, motivation, and performance

evaluation.

As a first step, Mark gathered some operating statistics which are summarized in Exhibit B$.$

REQUIRED: As Mark MacKay, prepare a report to the president of Linden Manufacturing Limited.

EXHIBIT A

LINDEN MANUFACTURING LIMITED

Operating Statement

For the Year Ended December $31,2016$

Eastern Western Total

Sales................................................................................. $$858,750$ $$967,500$ $$1,826,250$

Manufacturing cost of sales:

Variable processing costs............................................

Fixed overhead costs...................................................

$450,000$

$150,000$

$390,000$

$175,000$

$840,000$

$325,000$

Total manufacturing cost of sales $...................................600,000565,0001,165,000$

Gross Profit $.....................................................................258,750402,500661,250$

Variable selling & administration...................................

Fixed selling expenses.....................................................

$157,500$

$114,545$

$166,250$

$75,455$

$323,750$

$190,000$

Total selling & administration $........................................272,045241,705513,750$

Divisional profit $($loss$)....................................................$ $$(13,295)$ $$160,795147,500$

Head office administration.............................................. $75,000$

Net income before taxes.................................................. $ $72,500$

Investment base...............................................................

Return on investment $......................................................$

$$450,000$

$(3\mathrm{.}0)\%$

$$800,000$

$20\mathrm{.}1\%$

$$1,250,000$

$5\mathrm{.}5\%$

EXHIBIT B

LINDEN MANUFACTURING LIMITED

$2016$ Actual Operating Data

Eastern Western Total

Unit sales: Domestic.............................

Foreign $..............................$

$30,000$

$15,000$

$25,000$

$7,500$

$55,000$

$22,500$

Total $...................................45,00032,50077,500$

Sales price per unit: Domestic.............................

Foreign $...............................$

Variable manufacturing cost$/$unit$....................................$

$$21\mathrm{.}50$

$$14\mathrm{.}25$

$$10\mathrm{.}00$

$$30\mathrm{.}00$

$$29\mathrm{.}00$

$$12\mathrm{.}00$

Variable selling & administration cost$/$unit: