Ontario Pump Company, a small manufacturing company in Toronto, Ontario, manufac
ID: 2490627 • Letter: O
Question
Ontario Pump Company, a small manufacturing company in Toronto, Ontario, manufactures three 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.
Maria 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 S-Pump line immediately. S-Pumps would not be returned to the product line unless the problems with the pump can be identified and resolved.
Increase quarterly sales promotion by $350,000 on the R-Pump product line in order to increase sales volume by 15 percent.
Cut production on the F-Pump line by 50 percent, and cut the traceable advertising and promotion for this line to $85,000 each quarter.
Justin 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.
The selling and administrative expense is allocated to the three pump lines based on average sales volume over the past three years.
Special selling expenses (primarily advertising, promotion, and shipping) are incurred for each pump as follows:
Calculate the net impact on income before taxes for each of the three suggestions.
RPump, SPump, and FPump
Please explain your answers
Ontario Pump Company, a small manufacturing company in Toronto, Ontario, manufactures three 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.
Explanation / Answer
ONTARIO PUMP COMPANY Income Statement Second Quarter (in thousands) R-Pump F-Pump S-Pump Total Sales 5,525 3,360 $ 3,245 $ 12,130 Cost of goods sold 3,619 2,875 3,425 9,919 Gross margin 1,906 485 $ (180 ) $ 2,211 Selling and administrative expenses 1,278 691 487 2,456 Income before taxes 628 (206 $ (667 ) $ (245 ) Number of units sold 8.5 10.5 5.5 Suggestion 1 - discontinue S Pump R-Pump F-Pump Total Sales 5,525 3,360 8,885 Cost of goods sold 3,619 2,875 6,494 Additional Fixed manufacturing overhead ( Refer Note 1) 268.9 213.62 483 Gross margin 1,637 271 1,908 Selling and administrative expenses 1,278 691 1,969 Additional Selling expenses 105.71 64.29 170 Income before taxes 359 -420 -61 Number of units sold 8.5 10.5 By discontinuing S Pump the loss of the company reduces from 241 to 61 Note 1 Fixed Manufacturing Overhead of S Pump = 87.73 per pump Total Fixed Manufacturing overhead = 87.73 * 5.5 = 482.52 As these are fixed cost , these will have to be transferred to R Pump and F Pump in the ratio of cost of goods sold ie 3619 : 2875 Hence amount transferred to R Pump = 482.52*3619/6494 = 268.90 Hence amount transferred to F Pump = 482.52*2875/6494 = 213.62 Selling expenditure of 170000 to be allocated on the basis of sales ie 5525 : 3360 Hence additional selling expenses R Pump = 170000*5525/ 8885 = 105712 F Pump = 170000*3360/ 8885 = 64288.13 Suggestion 2 = Increase sales promotion ofR Pump R-Pump F-Pump S Pump Total Sales ( refer working below) 6,354 3,360 3,245 12,959 Cost of goods sold 4,162 2,875 3,425 10,462 Additional Fixed manufacturing overhead ( Refer Note 1) 0 0 0 0 Gross margin 2,192 485 -180 2,497 Selling and administrative expenses 1,278 691 487 2,456 Additional sales promotion expenses 350 350 Income before taxes 564 -206 -667 -309 Number of units sold 9.775 10.5 5.5 New Sales volume= 8.5 * 115% = 9.775 Selling price = 650 Sales = 650*9.775 = 6353.75 Cost of goods sold = 425.76 * 9.775 = 4161.80 This suggestion increases the company's loss to 309 fom a loss of245 Suggestion 3 - Cut production on F Pump by 50% and reduce selling expenses to 85000 R-Pump F-Pump S Pump Total Sales ( refer working below) 5,525 1,632 3,245 10,402 Cost of goods sold 3,619 1,396 3,425 8,440 Additional Fixed manufacturing overhead ( Refer Note 1) 0 0 0 0 Gross margin 1,906 236 -180 1,962 Selling and administrative expenses 1,278 691 487 2,456 Less Decrease in sale promotion ( 350000 - 85000) 0 -265 0 -265 Income before taxes 628 -190 -667 -229 Number of units sold 8.5 5.1 5.5 New Sales volume= 50% * 10.5= 5.1 Selling price = 320 Sales = 320*5.1= 1632 Cost of goods sold = 273.81 * 5.1 = 1396.43 This suggestion decreases the company's loss to 229 fom a loss of245
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.