Manatau Company produces three types of dog foods, Kibble Dog Food, Canned Dog Food

and Semi$-$Moist Dog Food. The company has been profitable and operated at capacity for many

years. However, in the last two years, prices on all dog foods were reduced and selling expenses

increased to meet competition and to keep the plant operating at capacity. The current trend on

nutrition and healthy dog foods has driven up the prices for ingredients used by Manatau

Company. The company$$s cost accountant just completed the latest quarterly report of the

current year for Manatau Company$$s three major product lines:

Kibble

Dog Food

Canned

Dog Food

Semi$-$Moist

Dog Food

Sales $$2,400,000$ $$1,350,000$ $$1,350,000$

Cost of goods sold $$1,572,000$ $$1,155,000$ $$1,425,000$

Gross profit $$828,000$ $$195,000($$$75,000)$

Selling and admin expenses $$555,000$ $$277,500$ $$202,500$

Income before tax $$273,000($$$82,500)($$$277,500)$

The cost accountant also assembled the following information relating to selling price per

unit and manufacturing cost per unit for each of the three product lines:

Kibble

Dog Food

Canned

Dog Food

Semi$-$Moist

Dog Food

Selling price $$300\mathrm{.}00$ $$135\mathrm{.}00$ $$270\mathrm{.}00$

Direct material $$46\mathrm{.}50$ $$25\mathrm{.}50$ $$75\mathrm{.}00$

Direct labor $$60\mathrm{.}00$ $$30\mathrm{.}00$ $$90\mathrm{.}00$

Variable manufacturing overhead $$67\mathrm{.}50$ $$45\mathrm{.}00$ $$90\mathrm{.}00$

Fixed manufacturing overhead $$22\mathrm{.}50$ $$15\mathrm{.}00$ $$30\mathrm{.}00$

Total manufacturing cost $$196\mathrm{.}50$ $$115\mathrm{.}50$ $$285\mathrm{.}00$

The company is manufacturing at capacity and is selling all the dog foods it produces. All three

product lines are manufactured with common equipment and facilities. The selling and

administrative expense is allocated to the three product lines based on average sales volume

over the past three years. Special selling expenses, primarily advertising and promotion and

shipping, for each product line, are as follows:

Kibble

Dog Food

Canned

Dog Food

Semi$-$Moist

Dog Food

Advertising and promotion $($quarterly$)$ $$315,000$ $$150,000$ $$60,000$

Shipping $($per unit$)$ $$15\mathrm{.}00$ $$6\mathrm{.}00$ $$15\mathrm{.}00$

The Chief Executive Officer $($CEO$)$ of Manatau Company is concerned about the results of the

quarterly report, and she suggested the following options to the Chief Financial Officer $($CFO$)$

of Manatau Company:

Increase quarterly sales promotion by $$150,000$ on Kibble Dog Food in order to increase

sales volume by $15$ percent.

$2.$ Cut production on Canned Dog Food by $50$ percent and cut the traceable advertising and

promotion for this product line to $$30,000$ each quarter.

$3.$ Discontinued the Semi$-$Moist Dog Food immediately. The CEO is of the opinion that SemiMoist Dog Food would not be returned to the production unless the problems can be

identified and resolved.

After reviewing the quarterly report, the CFO asked the cost accountant to prepare an analysis

to determine the financial relationships and the possible effects of the proposed options on

Manatau Company$$s operating results. The CFO pointed out that the current income statement

as presented by the cost accountant is not suitable for analysis and decision making.

Solve part a with detailed workings, answers are given in the image