Ontario Pump Company, a small manufacturing company in Toronto, Ontario, manufac

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 ONTARIO PUMP COMPANY Income Statement Second Quarter (in thousands) R-Pump F-Pump S-Pump Total Sales Cost of goods sold $6,141$3,924 $3,717$13,782 11,304 4,023 3,358 3,923 Gross margin Selling and administrative $2,118 1,420 566 (206) 2,478 2,785 807 558 expenses Income before taxes $ 698(241) (764) $ (307) 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 $390,000 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 $105,000 each quarter

Explanation / Answer

R-Pump F-Pump S-Pump Total Sales          6,141         3,924      3,717    13,782 cost of goods sold          4,023         3,358      3,923    11,304 gross margin          2,118             566       (206)      2,478 Selling expense          1,420             807          558      2,785 income before taxes              698           (241)       (764)       (307) suggestions: Discountinue sline pump R-Pump F-Pump Total Sales          6,141         3,924    10,065 cost of goods sold          4,023         3,358      7,381 gross margin          2,118             566      2,684 Selling expense          1,420             807      2,227 income before taxes              698           (241)          457 increase quarterly sales promotion R-Pump F-Pump S-Pump Total Sales          7,062         3,924      3,717    14,703 cost of goods sold          4,023         3,358      3,923    11,304 gross margin          3,039             566       (206)      3,399 Selling expense          1,810             807          558      3,175 income before taxes          1,229           (241)       (764)          224 Cut production on the F-pump by 50% R-Pump F-Pump S-Pump Total Sales          6,141         1,962      3,717    11,820 cost of goods sold          4,023         1,679      3,923      9,625 gross margin          2,118             283       (206)      2,195 Selling expense          1,420             702          558      2,680 income before taxes              698           (419)       (764)       (485) F-pump   R-pump Selling price per unit              360             690 variable cost: Direct material                60             102 Direct labor                78             138 Variable manufacturing overheads              108             153 Total variable cost              246             393 contribution per unit              114             297 contribution per direct labor $            1.46            2.15

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