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Luke Corporation produces a variety of products, each within its own division. Last year, the managers at Luke developed and began marketing a new chewing
Luke Corporation produces a variety of products, each within its 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 $ per case, has not had the
market success that managers expected, and the company is considering dropping Bubbs.
The productline income statement for the past months follows:
All products at Luke receive an allocation of corporate overhead costs, which is computed as percent of product revenue. The
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:
Roy 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:
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 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 avoided if Bubbs is dropped.
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