Question

In: Accounting

Alberta Gauge Company, Ltd., a small manufacturing company in Calgary, Alberta, manufactures three types of electrical...

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.

  

ALBERTA GAUGE COMPANY, LTD.
Income Statement
Second Quarter
(in thousands)
Q-Gauge E-Gauge R-Gauge Total
Sales $ 1,600 $ 900 $ 900 $ 3,400
Cost of goods sold 1,048 770 950 2,768
Gross margin $ 552 $ 130 $ (50 ) $ 632
Selling and administrative expenses 370 185 135 690
Income before taxes $ 182 $ (55 ) $ (185 ) $ (58 )

  

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 $100,000 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 $20,000 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:

Quarterly Advertising and Promotion Shipping Expenses
Q-gauge $ 210,000 $ 10 per unit
E-gauge 100,000 4 per unit
R-gauge 40,000 10 per unit

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

Q-Gauge E-Gauge R-Gauge
Direct material $ 31 $ 17 $ 50
Direct labor 40 20 60
Variable manufacturing overhead 45 30 60
Fixed manufacturing overhead 15 10 20
Total $ 131 $ 77 $ 190

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

Q-gauge $ 200
E-gauge 90
R-gauge 180

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?

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?

Solutions

Expert Solution

Feel free to ask any clarification, if required. Please provide feedback by thumbs up, if satisfied. It will be highly appreciated. Thank You.


Related Solutions

Alberta Gauge Company, Ltd., a small manufacturing company in Calgary, Alberta, manufactures three types of electrical...
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.    ALBERTA GAUGE COMPANY, LTD. Income Statement...
Alberta Gauge Company, Ltd., a small manufacturing company in Calgary, Alberta, manufactures three types of electrical...
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.    ALBERTA GAUGE COMPANY, LTD. Income Statement...
Alberta Gauge Company, Ltd., a small manufacturing company in Calgary, Alberta, manufactures three types of electrical...
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.    ALBERTA GAUGE COMPANY, LTD. Income Statement...
Ontario Pump Company, a small manufacturing company in Toronto, Ontario, manufactures three types of pumps used...
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...
Petula Corporation’s small motor division manufactures small electrical motors that are used in the manufacture of...
Petula Corporation’s small motor division manufactures small electrical motors that are used in the manufacture of electric appliances. The Appliance division manufactures appliances and uses one small electrical motor in each appliance. These motors are currently purchased from another company at a cost of $28. The appliance division requires 15,000 motors annually. The small motor division sells its motors to the outside market at a price of $32 each. The cost to manufacture one motor is as follows: Variable cost...
Boxes Ltd manufactures two types of boxes, plastic and cardboard, and currently it applies manufacturing overhead...
Boxes Ltd manufactures two types of boxes, plastic and cardboard, and currently it applies manufacturing overhead to all units at the rate of $50 per direct labour hour. Production information is as follows:                   Product Information Plastic box Cardboard box Direct material cost per unit   $20 $10 Direct labour cost per hour $20 $10 Number of units produced 100,000 200,000 The management accountant Sally suggests that Activity-Based Costing (ABC) is more appropriate for the firm. She suggests the firm’s overhead...
Green Grocer Ltd is a manufacturing entity in the city of Clutchmore. The company manufactures and...
Green Grocer Ltd is a manufacturing entity in the city of Clutchmore. The company manufactures and sells a single product by the name of Product P. In the financial year ended 30 June 2020, 200,000 units of Product P were sold for $10 each. The cost of sales was $6 per unit, and the total amount was considered as variable cost. In addition, other expenses incurred by the company were as follows: Variable Cost component Fixed Cost component Marketing expenses...
Edfor Inc. is a manufacturing company with offices and plants in Ontario, Québec and Alberta. The...
Edfor Inc. is a manufacturing company with offices and plants in Ontario, Québec and Alberta. The company started operations in 1975 and currently has an approximate annual payroll of $10,000,000 in each jurisdiction. The company is considering terminating the employment of five customer service representatives in each of their Ontario and Québec locations. To assist with forecasting the budget for the balance of the year, the Director of Finance has asked you to prepare a memo, detailing all legislated payments...
Abbeville Company manufactures faucets in a small manufacturing facility. The faucets are made from brass. Manufacturing...
Abbeville Company manufactures faucets in a small manufacturing facility. The faucets are made from brass. Manufacturing has 90 employees. Each employee presently provides 36 hours of labor per week. Information about a production week is as follows: Standard wage per hr. $15.00 Standard labor time per faucet 40 min. Standard number of lb. of brass 3 lb. Standard price per lb. of brass $2.40 Actual price per lb. of brass $2.50 Actual lb. of brass used during the week 14,350...
Abbeville Company manufactures faucets in a small manufacturing facility. The faucets are made from brass. Manufacturing...
Abbeville Company manufactures faucets in a small manufacturing facility. The faucets are made from brass. Manufacturing has 90 employees. Each employee presently provides 36 hours of labor per week. Information about a production week is as follows: Standard wage per hr. Standard labor time per faucet Standard number of lb. of brass Standard price per lb. of brass Actual price per lb. of brass Actual lb. of brass used during the week Number of faucets produced during the week Actual...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT