The controller of Fidelity Sounds Inc, prepared the following product profitability report for management, using activity-based costing methods for allocation both the factory overhead and the marketing expenses. As such, the controller has confidence in the accuracy of this report. In addition, the controller interviewed the vice president of marketing, who indicated that the floor loudspeakers were an older product that was highly recognized in the marketplace. The ribbon loudspeakers were a new product that was recently launched. The ribbon loudspeakers are a new technology that have no competition in the marketplace, and it is hoped that they will become an important future addition to the company’s product portfolio. Initial indications are that the product is well received by customers. The controller believes that the manufacturing costs for all three products are in line with expectations.

1. Calculate the gross profit and income from operations to sales ratio for each product.

2. Write a memo using the product profitability report and the calculations in (1) to make recommendations to management with respect strategies for the three products.

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Floor Loudspeakers Loudspeakers Loudspeakers Ribbon Bookshelf Totals $1,200,000 816,000 $ 384,000 Sales Less cost of goods sold Gross profit Less marketing expenses Income from operations $800,000 448,000 $600,000 552,000 $2,600,000 1,816,000 $ 784,000 $352,000 72,000 $ 48,000 42,000 480,000 594,000 $ 190,000 $ (96,000) $280,000 $ 6,000