PROBLEM

Princess Innovations and New Kingdoms, Inc. (PINK, Inc. for short), is a multi-purpose cooperative founded by Disney Princesses around the world. Its main goal is to solve the world's problems through courage, kindness, and techno-magical innovations. In response to the widespread water shortage experienced across the world, PINK enlisted the help of Elsa of Arendelle, Ariel of Atlantica, and Moana of Motunui to design a new line of products for the company. After months of research, PINK launched three new products in January: Frozen4ever is a never- melting popsicle stick that replaces drinking water, Whatzit is a filter that removes impurities in any water source, and Heart of the Sea removes salt from seawater to make it potable. To ensure efficiency in production, all three products are produced in an exclusive factory managed by Fairy Godmother. All three products use the same ingredients but require slightly different processes to create.

1. Direct Materials (DM)

Direct Material (DM)	Cost per one unit of DM	Raw Material Required PER UNIT
		Frozen4ever	Whatzit	Heart of the Sea
Colors of the Wind	12.25	1	2	5
Aquamarine	23.50	2	3	2
Well Wishes	7.25	2	5	5
Sun Drop Flower	2.00	7	1	3
Bibbidi Bobbidi Boo	5.00	2	3	7

2. Direct Labor (DL)

Direct Labor (DM)	Cost per DIRECT LABOR HOUR	Raw Material Required PER UNIT
		Frozen4ever	Whatzit	Heart of the Sea
Direct Labor	50	5	3	7.5

3. Manufacturing Overhead (MOH)

Bookkeeping of company expenses was assigned to Princess Aurora. Because she has some problems staying awake during work hours, there were noticeable gaps in her expense reports. The expenses below are solely for the three products, and Aurora confirms that the behavior of manufacturing overhead costs was consistent in recent months.

PURCHASE ORDER	JANUARY	FEBRUARY	MARCH
Quantity Produced/Sold	25,200	40,600	32,700
Supervision	176,400	---	228,900
Security	6,396,300	---	6,396,300
Repair	---	1,006,880	810,960
Maintenance	831,600	1,339,800	---
Power	---	2,030,000	1,635,000
Parts and Material Handling	846,640	---	1,098,720
Sanitation	---	1,248,300	1,248,300
Oils and Adhesives Provision	836,640	---	1,085,640
Engineering and Quality Control	793,800	1,278,900	---
Other MOH	4,474,400	---	4,474,400

4. Selling Price, Expected Sales and Sales Mix

The company has continued using the same price since they first launched the products. The company estimates an healthy April sales level of 45,000 units for Frozen4ever, Whatzit, and Heart of the Sea. Based on historical data, they expect the following sales mix:

	Frozen4ever	Whatzit	Heart of the Sea
Selling Price	750.00	650.00	1,200.00
Sales Mix	20%	30%	50%

REQUIRED

1. Based on the information provided in the case, determine the variable cost per unit of Frozen4ever, Whatzit, and Heart of the Sea. (Tip: Variable Cost per unit = variable cost of direct material + variable cost of direct labor + variable cost of manufacturing overhead)

2. Using the expected sales mix, determine the Net Income the company will earn by selling the three products. The company applies a 30% tax rate. (Tip: Prepare the Income Statement using the Contribution Margin format).

3. Consider that PINK would like to improve it's current costing system by allocating their fixed manufacturing costs based on direct labor hours (instead of allocating equally across the three products). Determine the profitability of each product. (TIP: Find the total FIXED manufacturing cost before reallocating.)

4. After switching their costing system to allocate fixed manufacturing cost on the basis of direct labor hours. PINK decided to drop the least profitable product. Should PINK proceed with this? Assume that if PINK drops one product, they will be able to sell 25% more of the remaining two products. Fixed manufacturing costs will remain the same and all variable costs associated with the dropped product are no longer considered.