The owners of Katy EH Manufacturing, a small manufacturer of gas grills, have prepared a preliminary budget for the upcoming year and would like to assess the financial impact of several alternative scenarios, including dropping a product; changing the price on a product, with a resulting increase in volume; and shifting advertising focus, with a resulting shift in volume from one product to another. A new budget must be prepared. At year-end, the actual results are better than had been planned, but not necessarily better than what should have been, given actual sales volumes.

Hint Consider using the topic of contribution analysis as an easy way to analyze profit-planning issues such as adding or dropping a product or service; changing a price; adding or decreasing expected volumes; or preparing a profit budget. In this particular situation, there are three products, each with different proportions of variable and fixed costs. Make sure you can identify variable and fix costs. Pay attention to the relation of profit and contribution margin. In addition, you also need to consider non-financial factors prior to make your decision.

Required :

a) Should Katy EH drop Grill A? The owners wanted to know the impact of dropping Grill A from their line of products. Sharp was told to assume that the volumes and selling prices of the other two products would be the same whether or not the Grill A product line was dropped.

b) Should Katy EH lower the price of Grill C? The owners wanted to know the impact if they lowered the price of Grill C to $75 and if doing so led to a 20,000-unit increase in sales of Grill C .

c) Should Katy EH change its advertising focus? The owners wanted to know the impact of a 10,000-unit increase in Grill C volume and a related 10,000-unit decrease in Grill A volume because of a shift in advertising emphasis.

d) Should Katy EH lower the price of Grill C and change its advertising focus? The owners wanted to know the impact of lowering the price of Grill C to $75 and shifting the advertising focus more to Grill C, thereby decreasing Grill A volume by 10,000 units and increasing Grill C volume by 30,000 units .

e) Prepare a revised 2016 profit budget assuming the owners chose Option 2 lowering the price of Grill C to $75 and expecting sales volume of that grill to increase to 220,000 units.

f) The actual results for 2016 are shown in Exhibits3-4. Was 2016 net income more or less than what should have been expected given these actual volumes and prices? If the results were different, why .

Exhibit 1: Operating Budget 2016: Draft 12/18/2015

Sales	$41,200,000
Less: cost of products sold	22,800,000
Gross margin	$18,400,000
SG&A	9,350,000
Other costs	2,100,000
Operating income	$6,950,000
Less: Interest expense	420,000
Plus: Interest income	150,000
Income before tax	$6,680,000
Income taxes	2,338,000
Net income	$4,342,000

Exhibit 2: Operating Budget 2016: Draft 12/18/2008

	Grill A	Grill B	Grill C	Notes
Planned units	80,000	120,000	200,000
Per unit
Sales price	$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 cost:
Supplies	7	2	1	directly related to volume
Labor	10	8	4	one-half varies with direct labor, the rest is fixed
Supervision	8	3	1	unrelated to volume
Energy	12	6	4	one-half varies with direct labor, the rest is fixed
Depreciation	22	7	5	unrelated to volume
Support*	12	6	3	unrelated to volume
All other	11	2	1	unrelated to volume
Subtotal	$82	$34	$19
Total cost	$120	$60	$30
Profitability	$30	$50	$50

*This category comprises accounting, IT, human resources, legal, and others supporting the production of these products.

Exhibit 3: Actual 2016 Volume & Price

	Grill A	Grill B	Grill C
Price	$150	$110	$75
Volume	115,000	110,000	225,000

Exhibit 4: 2016 Operating Results: Draft 1/19/2017

Revenue	$46,225,000
Variable costs:
Materials	4,800,000
Direct labor	5,200,000
Supplies	1,300,000
Indirect labor	1,500,000
Energy	1,600,000
Total variable cost	$14,400,000
Fixed costs
Indirect labor	1,300,000
Supervision	1,200,000
Energy	1,350,000
Depreciation	3,660,000
Support	2,300,000
All other	1,380,000
Total fixed cost	$11,190,000
Total cost	$25,590,000
Gross margin	$20,635,000
SG&A	9,350,000
Other costs	2,100,000
Operating income	$9,185,000
Less: interest expense	420,000
Plus: interest income	150,000
Income before tax	$8,915,000
Income taxes	3,120,250
Net income	$5,794,750