Question Manufacturing Company, a small manufacturing company in Toronto, manufactures 3
types of pumps used in a variety of applications. For many years the company has been
profitable and has operated at capacity. However, in the last two years prices on all pumps were
reduced and selling expenses increased to meet competition and keep the plant operating at
capacity. Second-quarter results for the current year, which follow, typify recent experience.
ABC MANUFACTURING COMPANY
Income Statement
2nd quarter
(in thousands)
	R-Pump	F-Pump	S-Pump	Total
Sales	$4,800	$2,700	$2,700	$10,200
COGS	3,144	2,310	2,850	8,304
Gross Margin	$1,656	$390	$(150)	$1,896
Selling, Admin & other expenses	1,110	555	405	2,070
Income before the taxes	$546	$(165)	$(555)	$(174)
Robo, the company's president, is concerned about the results. After reviewing the second-
quarter results she asked her management staff to consider the following 3 suggestions:
1) Discontinue the S-Pump line immediately. S-Pump would not be returned to the product line
unless the problems with the pump can be identified and resolved.
2) Increase quarterly sales promotion by $300,000 on the R-Pump product line in order to
increase sales volume by 15%.
3) Cut production on the F-Pump line by 50%, and cut the traceable advertising and promotion
for this line to $60,000 each quarter.
Nobo, the controller, suggested a more careful study of the financial relationships to determine
the possible effects on the company's operating results of the president's proposed course of
action. The president agreed and assigned Sobo, the assistant controller, to prepare an analysis.
Sobo has gathered the following information:
- The unit sales prices for the 3 pumps are as follows:
R-Pump $600
F-Pump $270
S-Pump $540
- The company is manufacturing at capacity and is selling all the pumps it produces.
- All 3 pumps are manufactured with common equipment and facilities.
-The selling, admin and other expense is allocated to the 3 pump lines based on average sales
volume over the past 3 years.
- Special (avoidable) selling expenses (primarily advertising, promotion, and shipping) are
incurred for each pump as follows:
Quarterly Advertising & Promotion Shipping Expenses
R-Pump	$630,000		$30 per unit
F-Pump	$300,000		12 per unit
S-Pump	$120,000		30 per unit
- The unit manufacturing costs for the 3 pumps are		as follows:
	R-Pump	F-Pump	S-Pump
DM	$93	$51	$150
DL	120	60	180
Variable Manufacturing OH	135	90	180
Fixed Manufacturing OH	45	30	60
Total	$393	$231	$570
Required:
(i) Sobo says that ABC Manufacturing Company's product-line income statement for
the 2nd quarter is not suitable for analyzing proposals and making decisions such as
the ones suggested by Robo.
a) Explain why the product-line income statement as presented is not suitable for analysis
and decision making.
b) Describe and prepare an alternative income-statement format that would be more
suitable for analysis and decision making, and explain why it is better. (7 marks)
(ii) Use the operating data presented by Question Manufacturing Company and assume that the
president's proposed course of action had been implemented at the beginning of the second
quarter. Then evaluate the president's proposal by specifically responding to the following
points:
a) Are each of the 3 suggestions cost-effective? Support your discussion with an
the analysis that shows that net impact on income before taxes for each of the 3
suggestions.
b) Was the president correct in proposing that the S-Pump line is eliminated? Explain
your answer.
c) Was the president correct in promoting the R-Pump line rather than the F-Pump line?
Explain your answer.
d) Does the proposed course of action make effective use of the company's capacity?
Explain your answer.

Need help with question 2a,b,c,d