Problem 4-64 (Algo) Decision Whether to Add or Drop (LO 4-4) Agnew Manufacturing produces and sells three models of a single product, Standard, Superior, and DeLuxe, In a local market and in a regional market. At the end of the first quarter of the current year, the following Income statement (in thousands of dollars) has been prepared. Total Sales revenue Cost of goods sold $16,200 Local $12,660 12,080 9,290 Regional $3,540 2,790 Gross margin $ 4,120 $ 3,370 $ 750 Marketing costs Administrative costs 1,280 636 730 550 490 146 Total marketing and administrative $1,916 $1,220 $ 696 Operating profits $ 2,204 $2,150 $ 54 Management has expressed special concern with the regional market because of the extremely poor return on sales. This market was entered a year ago because of excess capacity. It was originally believed that the return on sales would improve with time, but after a year, no noticeable improvement can be seen from the results as reported in the preceding quarterly statement. In attempting to decide whether to eliminate the regional market, the following Information has been gathered. Sales revenue Variable manufacturing costs as a percentage of sales revenue Variable marketing costs as a percentage of sales revenue Product Sales by Markets Local Regional Standard Superior $5,020 $1,180 3,820 1,100 Deluxe 3,020 1,100 Standard $6,200 Products Superion $5,000 DeLuxe $5,000 60% 4 70% 60% 3 All administrative costs and fixed manufacturing costs would not be affected by eliminating the regional market. Marketing costs that are not listed as variable are fixed for the penod and separable by market Fixed marketing costs assigned to the regional market would he caved if that market were eliminated