Question

Mountain Company manufactures Hiking shoes and walking shoes. The projected incomefrom the two products is: Hiking shoes Walking shoes Sales $ 900,000 $1,500,000 Less: Variable costs (540,000) (600,000) Contribution margin 360,000 900,000 Less: Direct fixed expenses (400,000) (440,000) 2 Segment margin (40,000) 460,000 Less: Common fixed costs (allocated) (100,000) (150,000) Net income (loss) $ (140,000) $ 310,000 After studying the latest market evaluates, project manager is considering recommending that the president drop the Hiking shoe line. If the line is dropped, however, the saleof walking shoes will drop by 5%. In addition, there is a personal complication for the project manager. Mountain is locatedin a rural area where unemployment is over 12%. If the Hiking shoe division is shutdown, there will be layoffs, including the manager of the division. Manager of the division and project manager have been friends since high school. Their families get together atleast once a month. Manager of the division's wife is principal of the local elementary school,a job she loves. Required a. Explain a project manager's ethical obligations in this matter b. Should Mountain keep or drop the Hiking shoe line? Support your answer with appropriate calculations c. Marketing department has come back to the project manager with an analysisthat shows if advertising were increased by $50,000, then Hiking shoes sales would go up by5% and walking shoes by 3%. Should advertising be increased? Again, prove withyour supporting calculations d. If the Hiking shoe line is shut down, Mountain will have excess capacity. In carrying out her analyses, the project manager has been able to come up with only one viable alternative. The company could use part of the capacity to make canvas slippers.Estimated sales revenue from the slippers would be $300,000, and variable costs would be$170,000. Direct fixed expenses would be reduced to $100,000, and allocated fixed expenses wouldbe $50,000. While this option would not use all the available capacity, it would reduce the number of layoffs. Should the project manager recommend that this option be carried out?

Answer 1

a. Every business has social responsibilities. The ethical consideration in the situation is that, dropping the Hiking Shoes line would lead to layoffs, and that would increase the unemployment rate in the region, and would cause hardship to the families of the laid off employees. It would also adversely affect other businesses in the area, such as schools, hospitals, restaurants etc.

b. Mountain Company should keep the Hiking Shoes line. Dropping the hiking shoes line will decrease overall operating income by $ 5,000.

Differential Analysis
	Keep Hiking Shoes	Drop Hiking Shoes	Increase ( decrease) in Net Operating Income
Sales Revenue	$ 2,400,000	$ 1,425,000	$ (975,000)
Less: Variable Costs	1,140,000	570,000	570,000
Contribution Margin	1,260,000	855,000	(405,000)
Direct Fixed Expenses	840,000	440,000	400,000
Segment Margin	420,000	415,000	(5,000)
Common Fixed Costs	250,000	250,000	0
Net Operating Income	$ 170,000	$ 165,000	$ (5,000)

c. No, advertising should not be increased. Overall operating income decreases by $ 5,000.

	Hiking Shoes	Walking Shoes	Total
Sales Revenue	$ 945,000	$ 1,545,000	$ 2,490,000
Less: Variable Costs	567,000	618,000	1,185,000
Contribution Margin	378,000	927,000	1,305,000
Direct Fixed Expenses	400,000	440,000	840,000
Segment Margin	(22,000)	487,000	465,000
Additional Advertising Expense			50,000
Common Fixed Expenses			250,000
Net Operating Income			$ 165,000

d. Yes, this option should be carried out. Not only will overall operating income increase by $ 70,000, the number of layoffs would also be less.

	Drop Hiking Shoes, Manufacture Slippers
Sales Revenue	$ 1,800,000
Less: Variable Costs	770,000
Contribution Margin	1,030,000
Direct Fixed Expenses	540,000
Segment Margin	490,000
Common Fixed Costs	250,000
Net Operating Income	$ 240,000