TC 6-1 (Algo) Business Application Case: Analyzing inventory reductions at Furst, Inc.

Furst, Inc. believed it could increase the companys profits by eliminating some product-lines. Other companies have also tried to improve their financial performance by downsizing. In November 2017, General Electric announced it would begin a downsizing operation that would result in their exiting businesses using over $20 billion in assets in the next one to two years. In January 2018, Newell Brands, the company whose products include Tupperware, Sharpie pens, Elmers Glue, and Rawlings sports products, announced it would be reducing its product offerings to the extent that it would close half of its facilities and reduce its revenues by 20 percent. Consider the additional information presented as follows, which is hypothetical. All dollar amounts are in thousands, unit amounts are not. Assume that Furst decides to eliminate one shampoo product-line, Luster, for one of its segments that currently produces three products. As a result, the following are expected to occur:

1. (1) The number of units sold for the segment is expected to drop by only 190,000 because of the elimination of Luster, since most customers are expected to purchase a Anagen or Catagen product instead. The shift of sales from Luster to Anagen and Catagen is expected to be evenly split. In other words, the sales of Anagen and Catagen will each increase by 35,000 units.

   (2) Rent is paid for the entire production facility, and the space used by Luster cannot be sublet.

   (3) Utilities costs are expected to be reduced by $53,000.

   (4) All of the supervisors for Luster were all terminated. No new supervisors will be hired for Anagen or Catagen.

   (5) Half of the equipment being used to produce Luster is also used to produce the other two products and its depreciation cost must be absorbed by them. The remaining equipment has a remaining a book-value of $405,000 and can be sold for only $125,000.

   (6) Facility-level costs will continue to be allocated between the product lines based on the number of units produced.

Product-Line Earnings Statements
(Dollar amounts are in thousands)
Annual Costs of Operating Each Product Line	Anagen				Catagen				Luster					Total
Sales in units		520,000				520,000				260,000				1,300,000
Sales in dollars	$	1,040,000			$	1,040,000			$	520,000			$	2,600,000
Unit-level costs:
Cost of production		98,800				98,800				53,100				250,700
Sales commissions		13,520				13,520				6,500				33,540
Shipping and handling		23,400				20,800				10,400				54,600
Miscellaneous		7,800				5,200				3,200				16,200
Total unit-level costs		143,520				138,320				73,200				355,040
Product-level costs:
Supervisors' salaries		10,400				8,400				2,600				21,400
Facility-level costs:
Rent		113,000				113,000				56,000				282,000
Utilities		130,000				130,000				65,000				325,000
Depreciation on equipment		464,000				464,000				226,000				1,154,000
Allocated company-wide expenses		26,000				26,000				13,000				65,000
Total facility-level costs		733,000				733,000				360,000				1,826,000
Total product cost		886,920				879,720				435,800				2,202,440
Profit on products	$	153,080			$	160,280			$	84,200			$	397,560

Required Prepare revised product-line earnings statements based on the elimination of Luster. (Hint: It will be necessary to calculate some per-unit data to accomplish this.) (Enter your answers in thousands. Do not round intermediate calculations. Enter all amounts as positive values.)