Question

Question Manufacturing Company, a small manufacturing company in Toronto, manufactures 3
types of pumps used in a variety of applications. For many years the company has been
profitable and has operated at capacity. However, in the last two years prices on all pumps 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.
ABC MANUFACTURING COMPANY
Income Statement
2nd quarter
(in thousands)
	R-Pump	F-Pump	S-Pump	Total
Sales	$4,800	$2,700	$2,700	$10,200
COGS	3,144	2,310	2,850	8,304
Gross Margin	$1,656	$390	$(150)	$1,896
Selling, Admin & other expenses	1,110	555	405	2,070
Income before the taxes	$546	$(165)	$(555)	$(174)
Robo, the company's president, is concerned about the results. After reviewing the second-
quarter results she asked her management staff to consider the following 3 suggestions:
1)    Discontinue the S-Pump line immediately. S-Pump would not be returned to the product line
unless the problems with the pump can be identified and resolved.
2)    Increase quarterly sales promotion by $300,000 on the R-Pump product line in order to
increase sales volume by 15%.
3)    Cut production on the F-Pump line by 50%, and cut the traceable advertising and promotion
for this line to $60,000 each quarter.
Nobo, 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 Sobo, the assistant controller, to prepare an analysis.
Sobo has gathered the following information:
-    The unit sales prices for the 3 pumps are as follows:
R-Pump    $600
F-Pump    $270
S-Pump    $540
-    The company is manufacturing at capacity and is selling all the pumps it produces.
-    All 3 pumps are manufactured with common equipment and facilities.
-The selling, admin and other expense is allocated to the 3 pump lines based on average sales
volume over the past 3 years.
- Special (avoidable) selling expenses (primarily advertising, promotion, and shipping) are
incurred for each pump as follows:
Quarterly Advertising & Promotion    Shipping Expenses
R-Pump	$630,000		$30 per unit
F-Pump	$300,000		12 per unit
S-Pump	$120,000		30 per unit
- The unit manufacturing costs for the 3 pumps are		as follows:
	R-Pump	F-Pump	S-Pump
DM	$93	$51	$150
DL	120	60	180
Variable Manufacturing OH	135	90	180
Fixed Manufacturing OH	45	30	60
Total	$393	$231	$570
Required:
(i) Sobo says that ABC Manufacturing Company's product-line income statement for
the 2nd quarter is not suitable for analyzing proposals and making decisions such as
the ones suggested by Robo.
a)    Explain why the product-line income statement as presented is not suitable for analysis
and decision making.
b)    Describe and prepare an alternative income-statement format that would be more
suitable for analysis and decision making, and explain why it is better. (7 marks)
(ii) Use the operating data presented by Question Manufacturing Company and assume that the
president's proposed course of action had been implemented at the beginning of the second
quarter. Then evaluate the president's proposal by specifically responding to the following
points:
a)    Are each of the 3 suggestions cost-effective? Support your discussion with an
the analysis that shows that net impact on income before taxes for each of the 3
suggestions.
b)    Was the president correct in proposing that the S-Pump line is eliminated? Explain
your answer.
c)    Was the president correct in promoting the R-Pump line rather than the F-Pump line?
Explain your answer.
d)    Does the proposed course of action make effective use of the company's capacity?
Explain your answer.

Need help with question 2a,b,c,d

Answer 1

Ans:

a ) The suggestion cogs Sobo is correct the creation line Income statment is not the correct parameter for analysis and decision making by ABC manufacturing company because of the following reasons :-

1) The creation line income statement applyies where each and every activity of the creations line which is demanding that cost are identified . But in the case of the ABC company all the pumps are manufactured with common equipment and facilities , the identification of the activity of the each pumps are not possible here .

2) As far as decision making is concern we put all our calculation on the profit and loss generated at a certain point of time . If at that point of time the price of any creation goes down due to any reason or due to certain external factors any cost increase in any roduct line , we will simply stop producing that creation but on the other side we have to consider that the external factors which is now unfavourable to that creation line can turn favourble in future and may be result In huge profit. By immediately stopping the creation S pumps and again starting the same will incur addtional expenses should also be a part of the calculation. If due to external factor we stop producing any creation and with external factor turns positive we again start producing the same in not the worthwhile . The decision should be made taking the cost which will incure in restating the creationion of that creation.

3) It may happen that one creation in the manufacturing process will cover up the losses generated by the other creations . If the ABC company predict that the losses of Pump S is for a time being and that will be compensated with the profit R pump , then it should also considered that option also.

All the above parameters are also taken into consideration before making any decesion. The Income statment on the basis of the ROBO suggestion are as follows

After implemantation of ROBO instruction
Particular	R pumps	F pumps
Sales units ( in thousand)	8	10
New sales unit ( in thousand)	9.2	5
Sales revenue ( in thousand)	600	270
Unit cost of creationion	393	231
gross margin ( in thousand)	207	39
Total margin ( in thousand)	1904.4	195
Selling , advisement and other expenses ( in thousand)	1410	60
Income before Taxes ( in thousand)	494.4	135

Answer b)

The alternative Income statement are as follows :-

Particulars	Amount
Sales revenue    ( in thousand)	10200
Less - cost of good sold ( in thousand)	8304
gross margin ( in thousand)	1896
Less - selling , administrating , other exp ( in thousand)	1020
excluding avoidable expenses
Net profit	876

In the above calculatiothe firm is not incurring losses by continue the three pumps creationion . By the decision of immediately stopping of the pump S creation is not prudent . If for a time being the creation resulted into negative return due to certain external factors  may turn into positive return if the external factors favours . all the study relating to the pump industry , its external factors , market , demand , subsitution , price , costomers relationship , re creationion cost etc is to be done before taking any decision.

In the alrenative income approach we have all the three pump in the creation and overall the ABC company will be in the Profit. on the other hand if we take creation line Income approach we have to stop one creation as it will show nagative return to that creation without taking a overall veiw.