B. what other factors should Quinton consider before making this decisio P4.10 C

Question

B. what other factors should Quinton consider before making this decisio P4.10 Crawford sells three types of games to national toy companies. These games are known internally as Gamma, Omega, and Lambda. Recently the Gamma and Lambda lines have not shown acceptable profits. The most recent monthly results are: Unit sales Sales Cost of goods sold Gross margin Selling and administrative cost Profit Gamma 1,800 $900 810 90 204 S114) Omega 400 $1,200 600 600 218 382 Lambda 1,500 $1,500 1,245 255 240 S 15 Additional analysis reveals that $150 per month in facility-sustaining selling and administrative cost is charged to each product line. The remaining costs are assumed to vary directly with the number of units sold. Crawford is analyzing the following alternatives: 1. Discontinue the Gamma line and increase advertising at a cost of $10 per month for the Lambda line. This is expected to increase Lambda sales by 20 percent. 2. Discontinue the Gamma and Lambda lines and focus solely on the Omega line. This is expected to increase Omega sales by 40 percent. 3. Increase promotion of both the Gamma and Lambda lines. The promotion will increase selling costs by $25 per month for each line. Unit sales of Gamma are expected to increase by 15 percent while unit sales of Lambda are expected to increase by 10 percert 4. Do nothing. Leave the Gamma, Lambda, and Omega lines as they are. A. Evaluate each alternative. Which alternative is best for Crawford Company? equired: B. What additional factors should Crawford consider before making this decision?

Explanation / Answer

Since selling & adm.cost of 150 will remain fixed irrespective of any alternative, thus it is a sunk cost which we can ignore for decision making purpose. Total fixed cost = 150x3=450

Current scenario (ignoring fixed portion of selling & adm. Cost

Gamma . Omega. Lambda . Total

a) Sale . 900 1200 1500 3600

b) COGS. 810 600 1245 2655

c) Variable selling & adm . 54. 68 .   90. 212

Contribution. (a-b-c ) 36 532 165 733

Thus in the present case total profit (after deducting fixed cost) = 733-450=283. This will also be the answer for alternative 4 as in that alternative we have to maintain everything similar to current position. Now let us move towards other alt.

Alt.1 In this case we will discontinue production of Gamma and increase production of Lambda by 20%of 1500 =300 units. This new production units of lambda will be 1500+300=1800

Sale price per unit of lambda as per current data is 1500/1500=1. Thus total sales for 1800 units=1800.

Also COGS per unit as per current data =1245/1500=0.83. Therefore, total COGS for 1800 units=0.83x1800=1494. Selling &adm.cost for lambda =90+10=100. Thus profit for lambda = 1800-1494-100=206.

Profit for Omega will remain same as done in previous alternative that is 532.

Also fixed selling and adm. Cost will remain same as of previous one that is 450.

So total profit in alt.1 =206+532-450=288.

Alt.2 Here we will discontinue gamma and lambda production. This will increase production of Omega by 40%. This, proportionately everything will increase by 40% as a result profit will also increase by 40%. Thus profit from only product Omega will be 532x1.4=844.8. Thus total profit after deducting fixed selling & adm. = 844.8-450=394.8.

Alt.3 In this case we will increase the promotion of Gamma ad Lambda leaving Omega to be same as in alt.4

Gamma. Lambda

Sales . 1035 (900x1.15). 1650 (1500x1.15)

COGS. 931.5 1369.5

S&A. 115 . 280

Contribution. -11.5. 0.5

Total profit under this alt. =-11.5+0.5+532-450=71

Profit under different alt. Is as follows

Since, profit is max. In case of alt 2 thus company should discontinue production of Gamma and Lambda and increase production of omega by 40%.

2. Additional factor which it may consider are:-

1. Availability of increased AMT. Of material for Omega.

2. Assurance of market for selling additional units of Omega. Etc.

Alternative profit 1 206 2 288 3 71 4 283

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