Peter Johnson and Lily Brown own JB Manufacturing Company (JB). JB produced storage sheds in three primary models (A, B, and C). The industry was dominated by Coleman, Phoenix, and Meco, which made several of types of sheds. JB was a small player in the industry with a solid customer base and a profitable business over last few years. This year was a little different their profit was significantly lower than the prior years. The companys 2017 financials are provided in Exhibit 1. The company produces 3 products lets call them Shed A, B and C for simplicity. The standard costs for these three products are provided in Exhibit 2. The Selling, general, and administrative (SG&A), other costs, interest income, and interest expense are likely to remain the same no matter which product-line combinations the company produced. The company is thinking about the future and has provided a preliminary proforma 2018 sales budget in Exhibit 3. Favorable preliminary 2018 forecasts lead management to believe there will be excess cash flow in 2018. Management has requested that a consultant be hired to provide an analysis of several proposed 2018 investments. The details of the proposed investments are provided in Exhibit 4. The company hires your services as their consultant. They believe that they can improve their bottom-line (net profits) by changing the product mix, pricing and advertising decisions.

What is the effect of discontinuing Shed A?

Exhibit 1

Sales	38,650,000
minus cost of products sold	21,150,000
Gross Margin	17,500,000
SG&A	9,350,000
Other Costs	2,100,000
Operating Income	6,050,000
Minus Interest Expense	420,000
Plus Interest Income	150,000
Income Before Tax	5,780,000
Income Taxes	2,023,000
Net Income	3,757,000

Exhibit 2

	Shed A	Shed B	Shed C	Notes
Planned Units	75,000	100,000	205,000
Price per unit	$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 Costs:
Supplies	$7	$2	$1	directly related to volume
Labor	$10	$8	$4	50% variable, 50% fixed
Energy	$12	$6	$4	50% variable, 50% fixed
Supervision	$8	$3	$1	unrelated to volume
Depreciation	$22	$7	$5	unrelated to volume
Accounting/Legal/IT	$12	$6	$3	unrelated to volume
Other Fixed Costs	$11	$2	$1	unrelated to volume
Subtotal	$82	$34	$19
Total Costs	$120	$60	$30
Profitability	$30	$50	$50

Exhibit 3Proforma Sales Budget 2018MonthBudgeted Cash SalesBudgeted Credit SalesTotal BudgetedJanuary$900,000$2,100,000$3,000,000February$900,000$2,100,000$3,000,000March$900,000$2,100,000$3,000,000April$900,000$2,100,000$3,000,000May$900,000$2,100,000$3,000,000June$900,000$2,100,000$3,000,000July$900,000$2,100,000$3,000,000August$930,000$2,170,000$3,100,000September$960,000$2,240,000$3,200,000October$870,000$2,030,000$2,900,000November$1,140,000$2,660,000$3,800,000December$1,080,000$2,520,000$3,600,000$11,280,000$26,320,000$37,600,000The gross profit rate is 55% and the desired inventory level is 30% of next month's cost of sales.Management estimates that 5% of credit sales are not collectible.Of the credit sales that are collectible, 60% are collected in the month of sale and the remainder in the month following the sale.Cost of purchases of inventory each month is 70% of the next month's projected total sales.

All purchases of inventory are on account; 25% are paid in the month of purchase, and the remainder is paid in the month following the purchase.

Exhibit 4
Proposed Investments for 2018
	Proposal A	Proposal B	Proposal C
Initial Investment	$60,000	$60,000	$60,000
Cash Flow from Operations
year 1	$50,000	$30,000	$60,000
year 2	$6,000	$30,000	$0
year 3	$29,000	$25,000	$0
Disinvestment	$0	$0	$0
Life (years)	3	3	1