Ontario Pump Company, a small manufacturing company in Toronto, Ontario, manufac
ID: 2527573 • 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 ONTARIO PUMP COMPANY Income Statement Second Quarter in thousands) R-Pump FPump SPump Total Sales Cost of goods sold $8,000 $5,640 5,180 $18,820 5,240 4,827 5,467 15,534 $2,760 813 (287) 3,286 3,786 $ 910 (34 (1,064) (500) Gross margin Selling and administrative 1,850 1,159 Income before taxes 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 retuned to the product line unless the problems with the pump can be identified and resolved. Increase quarterly sales promotion by $500,000 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 160,000 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 unit sales prices for the three pumps are as follows: R-Pump F-Pump S-Pump $800 470 740 The company is manufacturing at capacity and is selling all the pumps it produces. All three pumps are manufactured with common equipment and facilities. The selling and administrative expense is volume over the past three years. Special selling expenses (primarily advertising. promotion, and shipping) are incurred for each pump as follows: . allocated to the three pump li nes based on average s ales and Promotion $830,000 500,000 320,000 Shipping Expenses R-Pump F-Pump s 50 per unit 32 per unit 130 per unitExplanation / Answer
2. a.
b-1.
b-2.
Yes the president was right in proposing to discontinue the S-pumps, because it is clear from the above calculations, that S-pumps is only able to cover its variable expenses It doesnt cover fixed cost or any other costs. It has zero contribution margin. Hence no point in continuing s pumps.
c-1. Calculate the contribution per direct-labour dollar for R-pump and F-Pump
c-2.
Yes. Because we can see in the above calculations. The direct labour dollar is greater in R-pump as comparerd to F-Pump. Also the contribution margin is greater in R-Pump as compared to F-Pump.
F-Pump R-Pump S-Pump Unit Selling Price 470 800 740 Unit Variable costs Raw material 71 113 170 Direct Labour 100 160 220 Variable manufacturing overhead 130 175 220 Shipping expenses 32 50 130 Total 333 498 740 Unit Contribution margin 137 302 0 Increase (decrease) in margin Increase (decrease) in units* F-Pump: 12,000 *50% -6000 R-pump: 10,000 * 15% 1500 S - Pump: 7000 * 100% -7000 Increase (decrease) in total contribution margin -822000 453000 0 Decrease (increase) in fixed cost 340000 -500000 320000 Increase (decrease) in segment contribution -482000 -47000 320000Related Questions
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