XYZ Manufacturing Company, a small manufacturing company in Toronto, manufacture
ID: 2463211 • Letter: X
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XYZ 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. XYZ 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. XYZ 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. XYZ 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.Explanation / Answer
Answer a ) The suggestion og Sobo is correct the product line Income statment is not the correct parameter for analysis and decision making by ABC manufacturing company because of the following reasons :-
1) The product line income statement applyies where each and every activity of the products 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 product goes down due to any reason or due to cert6ain external factors any cost increase in any roduct line , we will simply stop producing that product but on the other side we have to consider that the external factors which is now unfavourable to that product line can turn favourble in future and may be result In huge profit. By immediately stopping the product 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 product 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 production of that product.
3) It may happen that one product in the manufacturing process will cover up the losses generated by the other products . 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
Answer b)
The alternative Income statement are as follows :-
In the above calculatiothe firm is not incurring losses by continue the three pumps production . By the decision of immediately stopping of the pump S product is not prudent . If for a time being the product 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 production cost etc is to be done before taking any decision.
In the alrenative income approach we have all the three pump in the product and overall the ABC company will be in the Profit. on the other hand if we take product line Income approach we have to stop one product as it will show nagative return to that product without taking a overall veiw.
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 production 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 135Related Questions
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