Communication The controller of New Wave Sounds Inc. prepared the following prod

Question

Communication

The controller of New Wave Sounds Inc. prepared the following product profitability report for management, using activity-based costing methods for allocating 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 provided the following insight into the company's three products:

The home theater speakers are an older product that is highly recognized in the marketplace.

The wireless speakers are a new product that was just recently launched.

The wireless headphones are a new technology that has 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.

Based on the information provided:

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

Explanation / Answer

1. Ratio of Gross Profit to Sales -

Home Theater Speakers = 450000 / 1500000 * 100 = 30%

Wireless Speakers = 480000 / 1200000 * 100 = 40%

Wireless Headphones = 90000 / 900000 * 100 = 10%

Ratio of Income from Operations to Sales -

Home Theater Speakers = -150000 / 1500000 * 100 = -10%

Wireless Speakers = 360000 / 1200000 * 100 = 30%

Wireless headphones = 18000 / 900000 * 100 = 2%

2. Home Theater Speakers - This product is an older product in the market and it is highly recognised in the market but still it requires huge Marketing Costs which results in Loss from operations inspite of having a good Gross Profit Ratio and high Gross Profit. So, this product should be DISCONTINUED.

Wireless speakers - The wireless speakers are a new technology that was recently introduced and it is receiving positive response from the customers since both Gross Profit and Income from Operations are on the higher side. So the company should keep selling Wireless Speakers. Also the company can afford to increase the marketing expenses if required.

Wireless Headphones - The wireless headphones are new technology with no competition and it is earning low Gross Profit and low Income from operations since it is in its early days. But since the product is well received from the customers and it has no competition in the market, the company should continue selling this product as its Gross Profit and Income from operations are bound to go up in the coming years.

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