Question

Alberta Gauge Company, Ltd., a small manufacturing company in Calgary, Alberta, manufactures three types of electrical gauges used in a variety of machinery. For many years the company has been profitable and has operated at capacity. However, in the last two years, prices on all gauges were reduced and selling expenses increased to meet competition and keep the plant operating at capacity. Second-quarter results for the current year, which follow, typify recent experience.

ALBERTA GAUGE COMPANY, LTD. Income Statement Second Quarter (in thousands) Q-Gauge E-Gauge Sales $4,941 $2,828 Cost of goods sold 3,236 2,420 Gross margin $1,705 $ 408 Selling and administrative 1,143 expenses Income before taxes $ 562 R-Gauge $2,805 2,961 $ (156) 421 $ (577) Total $10,574 8,617 $ 1,957 2,145 $ (188) 581 $ (173)

Alice Carlo, the company’s president, is concerned about the results of the pricing, selling, and production prices. After reviewing the second-quarter results, she asked her management staff to consider the following three suggestions:

• Discontinue the R-gauge line immediately. R-gauges would not be returned to the product line unless the problems with the gauge can be identified and resolved.
• Increase quarterly sales promotion by $310,000 on the Q-gauge product line in order to increase sales volume by 15 percent.
• Cut production on the E-gauge line by 50 percent, and cut the traceable advertising and promotion for this line to $65,000 each quarter.

Jason Sperry, the controller, suggested a more careful study of the financial relationships to determine the possible effects on the company’s operating results of the president’s proposed course of action. The president agreed and assigned JoAnn Brower, the assistant controller, to prepare an analysis. Brower has gathered the following information.

• All three gauges are manufactured with common equipment and facilities.
• The selling and administrative expense is allocated to the three gauge lines based on average sales volume over the past three years.
• Special selling expenses (primarily advertising, promotion, and shipping) are incurred for each gauge as follows:

	Quarterly Advertising and Promotion					Shipping Expenses
Q-gauge		$	640,000				$	31		per unit
E-gauge			310,000					13		per unit
R-gauge			130,000					35		per unit

• The unit manufacturing costs for the three products are as follows:

		Q-Gauge					E-Gauge					R-Gauge
Direct material		$	94.00				$	52.00				$	151.00
Direct labor			122.00					62.00					182.00
Variable manufacturing overhead			137.00					92.00					182.00
Fixed manufacturing overhead			46.51					33.60					65.59
Total		$	399.51				$	239.60				$	580.59

• The unit sales prices for the three products are as follows:

Q-gauge	$	610
E-gauge		280
R-gauge		550

• The company is manufacturing at capacity and is selling all the gauges it produces.

Required:

1. 2. Use the operating data presented for Alberta Gauge Company and assume that the president’s proposed course of action had been implemented at the beginning of the second quarter.

2. a. Calculate the net impact on income before taxes for each of the three suggestions.

3. b-1. Calculate contribution margin for R-gauge

4. b-2. Was the president correct in proposing that the R-gauge line be eliminated?

5. c-1. Calculate the contribution per direct-labor dollar for Q-gauge and E-gauge.

6. c-2. Was the president correct in promoting the Q-gauge line rather than the E-gauge line?

Answer 1

The given question has to be solved on the basis of relevant costing. Find the summarized responses for the parts to be solved:

a) The overall impact of the decisions has resulted in increase in loss by $1,377,000.

b-1) Contribution margin for R-gauge is Nil after considering the variable shipping charges.

b-2) The discontinuance of R has resulted on savings of $130,000 which is in the nature of avoidable fixed cost. Hence, overall this has benefitted the organization. (Caution : In the uploaded image 3, the answer is given solely on the basis of Variable cost and hence it differs from the answer mentioned here. The proposal should be considered valid as that results in savings of $130k.)

c-1) For Q - 1.85

For E - 0.98

Kindly refer the below attached photos for the detailed solution.

:) Three proposals by President Discontinuance of R. Gauge - This should be checked on the basis, whether it is generating negative contribution ? Increase in Quartenly promotion for di- by $310k - Need to be evaluated in line with contribution and heuformance of other products & Sale by is ii) ii) Reduction Reduce in production of 't - 50% and Sales paraustion expense (traceable) to $ 65000/ ( in $ 800) Moles (1) Statement of Units & Shipping cost. R a) SALES 4941 2828 2805 b) Selling price p. v. 610 280 550 c) Units sold (a/b) 8100 10,100 5100 d) shipping Expenses (p...) 31 13 25 e) suspping Expense (total) 651,100 131,300 178,500 (2) statement showing selling & Adrun. Exp. VQ. E Total Exp. (Replachecole'statovent) 1143000 581000 48.000 Advertising & Promotion Exp. (givn) 640000 Shipping Eup ( calculated above) 251100 Mon- traceable Cof 251900 189700 - 310000 131300 130 000 178500 112 500

B) Statement showing Contribution 1 E Selling Puice 1 610 550 1 - Direct Material Direct Labour Variable Manu Contribution 94 122 137 52 62 92 182 Overhead (a 182 35 257 74 Shipping Ep 1 Had the proposed changes being made in the beginning of Quarten & the following changes would have occurred; W loss of contribution from 'R' Gil Saving in traceable I special ad reutising expense and shipping expense. (11) Increase in provectional expenses for & by $310000 & Sales by 15% (iv) Curtailment of promotional expenses for € by $65000 and loss of contribution of $74 on soso units - Income statement - (Basis suggestions) Total Sale Units 9315 soro 14365 Selling Price - 610 Sales 5682150 1414000 7096150 Less: Variable costs 3288195 1040300 4328495 2393955 373700 2767655 Less: Traceable tined costs (Distribution Basis not given) 1050600 - 1717055 Less 1015000 950000 Traceable vy selling Enp 1443955 30870 702065 65000

Totul from Shipping previous Page Expenses 1443,755 288765 - 1155190 308700 65650 243050 702055 354415 347640 (504100) (-) 156460 Untraceable Selling Eup case would have been The lose in that proposed (-) $1565 (in ooo) Increase of loss = 1565 - 188 = $1377 lin looo) (6 t Contribution for R - Gauge (as calculated in Note 3) is $35 peu unit, after considering shipping it is o. President's proposal of discontinuing Ŕ is not valid as the product i providing positive contribution without considering slupping changes and is having contribution of 'o in case of concidering slupping changes contribution for d = 257-31 = 226 E = 74 - 13 - 61 Direct Labor cost for 'D' : 122 (6) F1 Contribution beu direct Q = O = labor dollar ; 2261 122 61 1 62 a = 1.85 0.98 (1)-2 the contribution President's peu direct contention was correct labor hour for & since is hig