Trigg Pty Ltd, a small manufacturing company in Kalgoorlie, produces three types of pumps: R-pumps, F-pumps and 5-pumps. For many years the company has been profitable and has operated at full capacity. However, for the last two years, prices on all pumps have been reduced and selling expenses increased to meet competition and to keep the plant operating at capacity. The results for the second quarter, which follow, typify recent experience: Trigg Pty Ltd Profit Report Second quarter (in S'000s) R-pump F-pump S-pump Total Sales $4800 $2700 $2700 $10200 Cost of goods sold 3144 2310 2850 8304 Gross margin $1656 $390 $ (150) $ 1896 Selling and administrative expenses 1110 555 2070 Profit before taxes $ 546 $ (165) $ (555 $ (174) 405 Ned Trigg, the company's managing director, is concerned about the results of the pricing, selling and production policies. After reviewing the second-quarter results, he asked his management staff to consider his proposed course of action, comprising the following three changes to operations: Discontinue the S-pump line immediately. S-pumps would not be returned to the product line unless the problems with the pump could be identified and resolved. Increase quarterly sales promotion by $300 000 on the R-pump line in order to increase sales volume by 15 per cent. Cut production on the F-pump line by 50 per cent, and cut the traceable advertising and promotion for this line to $60 000 each quarter. Bob Collins, the management accountant, suggested a more careful study of the financial relationships to determine the possible effects on the company's operating results of the managing director's proposed course of action. The managing director agreed and assigned Jenna Smith, the assistant accountant, to prepare an analysis. Smith has gathered the following information: The unit sales prices for the three pumps are as follows: $600 A-pump F-pump S-pump $270 $540 The company is manufacturing at capacity and is selling all pumps it produces. All three pumps are manufactured with common equipment and facilities. The quarterly general selling and administrative expense is allocated to the three pump lines in Special selling expenses (primarily advertising, promotion and shipping) are incurred for each proportion to their dollar sales volume. pump as follows: Shipping expense $30 per unit 12 per unit 30 per unit Quarterly advertising and promotion R-pump $630 000 F-pump 300 000 S-pump - 12000 120,000 The unit manufacturing costs for the three products are as follows: R-pump F-pump Raw material $ 93 $ 51 Direct labour 120 60 Variable manufacturing overhead 135 90 Fixed manufacturing overhead 45 30 Total $393 $131 S-pump $150 180 180 60 $570 $231 Required: 1 Jenna Smith says that Trigg Pty Ltd's product line profit report for the second quarter is not suitable for analysing proposals and making decisions such as the ones suggested by Ned Trigg. (a) Explain why the product line profit report, as presented, is not suitable for analysis and decision making. (b) Describe an alternative profit reporting format that would be more suitable for analysis and decision making, and explain why it is better than the original. - nraranton far Trion Ptv Itd and UELISIUNI MURITY, 2 Construct an Excel spreadsheet using the operating data presented for Trigg Pty Ltd ana assume that the managing director's proposed course of action was implemented at the beginning of the second quarter. Then evaluate the managing director's proposal by specifically responding to the following points: (a) Is each of the three proposed changes cost effective? Support your discussion with an analysis that shows the net impact on profit before taxes for each of the three proposed changes. (b) Was the managing director correct in proposing that the S-pump line be eliminated? Explain your answer. (c) Was the managing director correct in promoting the R-pump line rather than the Fipump line? Explain your answer. (d) Does the proposed course of action make effective use of Trigg Pty Ltd's capacity? Explain the 3. Are there any other issues that Trigg Pty Ltd's management should consider before it drops the S-pump line? Explain your