Question

Agnew Manufacturing produces and sells three models of a single product, Standard, Superior, and DeLuxe, in a local market and in a regional market. At the end of the first quarter of the current year, the following income statement (in thousands of dollars) has been prepared. Local Regional $15,450 $11,760 $3,690 9,350 $ 3,110 $ 2,410 $ 700 Total Sales revenue Cost of goods sold Gross margin Marketing costs Administrative costs 12,340 2,990 670 1,160 490 430 564 134 Total marketing and administrative $ 1,724 $ 1,100 $ 624 $ 1,386 $ 1,310 $ 76 Operating profits Management has expressed special concern with the regional market because of the extremely poor return on sales. This market was entered a year ago because of excess capacity. It was originally believed that the return on sales would improve with time, but after a year, no noticeable improvement can be seen from the results as reported in the preceding quarterly statement. In attempting to decide whether to eliminate the regional market, the following information has been gathered.

Answer 1

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Agnew Manufacturing
Workings for a
If the regional market is dropped then entire contribution from the division would be lost. Company still has to bear total administrative costs and fixed manufacturing costs. Only fixed marketing costs would be saved.
Calculation of variable costs	Standard	Superior	Deluxe	Total
Sales	1,230.00	1,230.00	1,230.00	3,690.00
Variable manufacturing costs %	60%	70%	60%
Variable manufacturing costs	738.00	861.00	738.00	2,337.00
Variable marketing costs %	4%	2%	2%	Total
Variable marketing costs	49.20	24.60	24.60	98.40
Calculation of fixed costs	Total
Cost of good sold	2,990.00
Less: Variable manufacturing costs	2,337.00
Fixed manufacturing costs	653.00
Total marketing costs	490.00
Less: Variable marketing costs	98.40
Fixed marketing costs	391.60
Final answer for a
Calculation of net loss on dropping Regional market	Amount $
Sales	3,690.00
Less: Variable costs
Variable manufacturing costs	2,337.00
Variable marketing costs	98.40
Contribution lost	1,254.60
Add:
Fixed manufacturing costs	653.00
Administrative costs	134.00
Less: savings in Fixed marketing costs	391.60
Net impact on profit	1,650.00
So company will lose $ 1,650 if it drops regional market. So it should not be dropped.
Workings for b
Calculation of variable costs	Standard	Superior	Deluxe	Total
Sales	5,950.00	4,750.00	4,750.00	15,450.00
Variable manufacturing costs %	60%	70%	60%
Variable manufacturing costs	3,570.00	3,325.00	2,850.00	9,745.00
Variable marketing costs %	4%	2%	2%
Variable marketing costs	238.00	95.00	95.00	428.00
Calculation of fixed costs	Total
Cost of good sold	12,340.00
Less: Variable manufacturing costs	9,745.00
Fixed manufacturing costs	2,595.00
Total marketing costs	1,160.00
Less: Variable marketing costs	428.00
Fixed marketing costs	732.00
Final answer for b
Contribution format income statement	Standard	Superior	Deluxe	Total
Sales	5,950.00	4,750.00	4,750.00	15,450.00
Less: Variable costs
Variable manufacturing costs	3,570.00	3,325.00	2,850.00	9,745.00
Variable marketing costs	238.00	95.00	95.00	428.00
Total Variable costs	3,808.00	3,420.00	2,945.00	10,173.00
Contribution margin	2,142.00	1,330.00	1,805.00	5,277.00
Less: Fixed costs
Fixed manufacturing costs				2,595.00
Fixed marketing costs				732.00
Administrative costs				564.00
Total fixed costs				3,891.00
Net Income				1,386.00
Answer for c
To make the new model financially feasible it should earn at least the fixed cost incurred on it. So minimum contribution should be $ 110,000 per quarter.