Alberta Gauge Company, Ltd., a small manufacturing company in Calgary, Alberta,

Question

Alberta Gauge Company, Ltd., a small manufacturing company in Calgary, Alberta, manufactures three types of electrical gauges used in a variety of machinery. For many years the company has been profitable and has operated at capacity. However, in the last two years, prices on all gauges 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.

  

  

Alice 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 R-gauge line immediately. R-gauges would not be returned to the product line unless the problems with the gauge can be identified and resolved.

Increase quarterly sales promotion by $330,000 on the Q-gauge product line in order to increase sales volume by 15 percent.

Cut production on the E-gauge line by 50 percent, and cut the traceable advertising and promotion for this line to $75,000 each quarter.

Jason 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.

All three gauges are manufactured with common equipment and facilities.

The selling and administrative expense is allocated to the three gauge lines based on average sales volume over the past three years.

Special selling expenses (primarily advertising, promotion, and shipping) are incurred for each gauge as follows:

The unit manufacturing costs for the three products are as follows:

The unit sales prices for the three products are as follows:

The company is manufacturing at capacity and is selling all the gauges it produces.

Required:

2. Use the operating data presented for Alberta Gauge Company and assume that the president’s proposed course of action had been implemented at the beginning of the second quarter.

a. Calculate the net impact on income before taxes for each of the three suggestions.

b-1. Calculate contribution margin for R-gauge

b-2. Was the president correct in proposing that the R-gauge line be eliminated? Yes or No?

c-1. Calculate the contribution per direct-labor dollar for Q-gauge and E-gauge

c-2. Was the president correct in promoting the Q-gauge line rather than the E-gauge line? Yes or No?

ALBERTA GAUGE COMPANY, LTD. Income Statement Second Quarter (in thousands) Q-Gauge E-Gauge R-Gauge Total Sales $ 5,229 $ 3,090 $ 3,021 $ 11,340 Cost of goods sold 3,425 2,644 3,189 9,258 Gross margin $ 1,804 $ 446 $ (168 ) $ 2,082 Selling and administrative expenses 1,210 635 453 2,298 Income before taxes $ 594 $ (189 ) $ (621 ) $ (216 )

Explanation / Answer

2(a) Alberta Gauge Company Income Statement- Second Quarter (in $) Q-Gauge E- Gauge R-Gauge Tota Unit Produced and Sold 8300 10300 5300 Sales $6,013,350 $3,090,000 $3,021,000 $12,124,350 Less Variable Cost $3,286,800 $2,379,300 $3,021,000 $8,687,100 Contribution Margin $2,726,550 $710,700 $0 $3,437,250 Fixed Manufacturing Overhead Avoidable Fixed Selling & Admin Expense $990,000 $330,000 $150,000 $1,470,000 Unavoidable Fixed Selling Admin Expense (2298-1140) $1,158,000 Income Before Tax $1,736,550 $380,700 -$150,000 $809,250 W/Note- Computation of Variable cost Q-Gauge E- Gauge R-Gauge Direct Material $96 $54 $153 Direct Labour $126 $66 $186 Variable Manufacturing Overhead $141 $96 $186 Variable Shipping Expense $33 $15 $45 Total Variable Cost $396 $231 $570 W/Not-2: Computation of No. of Unit Produced & Sold Sales ( in 000) $5,229 $3,090 $3,021 Selling Price $630 $300 $570 No. of Unit Sales/ produced 8300 10300 5300 Hence net Impact on Before Tax will be ( -$216000 as per Original Income Statement )-($809250 as per segmental income Statement). Overal Impact in Income before tax $1025250 b. 1 Computation of Contribution Margin for R Gauge Unit Produced & Sold $5,300 Sales $3,021,000 Less; Variable Cost $3,021,000 Contribution Margin $0 b.2. Yes, the Preseident Was correct in Proposing that the R Gauge line be eliminated because it result in reduction of loss of $150000 c. 1 Computation of Contribution per Dollar for Q-Guage Line & E Guage Line Q-Gauge E- Gauge Unit Produced & Sold $8,300 10300 Sales $630 300 Less: Variable Cost Direct Material $96 $54 Direct Labour $126 $66 Variable Manufacturing Overhead $141 $96 Variable Shipping Expense $33 $15 Total Variable Cost $396 $231 Contribution $234 $69 c.2. Yes, The President was correct in Promoting the Q-Guage line rather than the E-Guage Line.

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