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

Format :

		Hiking Shoe	Walking Shoe
	Selling Price	900,000.00	1,500,000.00
	(-)Variable Expense	540,000.00	600,000.00
	Contribution Margin	360,000.00	900,000.00
	(-)Fixed Expense	400,000.00	440,000.00	Product related fixed cost, won't be incurred if product is shutdown.
	Segment Margin	(40,000.00)	460,000.00
	(-)Common Fixed cost	100,000.00	150,000.00	It has been followed that the Common fixed cost is unavoidable and to be allocated to the another line if one gets shutdown.
	Net Income	(140,000.00)	310,000.00	Another project will only be recommended if it get the income over and abover $170,000.

Answer (a) -		Explain a project manager's ethical obligations in this matter
		Provisions -
		Ethics is about making the best possible decisions concerning people, resources and the environment.
		When handling project challenges that arise during the cause of a project, it is his duty to analyze the root cause of the issue and resolve it to favor the project goal.
		As mentioned above, the professional ethics and practice of a project manager can sometimes be confusing and it’s difficult to draw a line between what is ethical and what is not. It should be divided into four broad sections: respect, responsibility, fairness and honesty
		Facts of the Case -
		Mountain is located in 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.
		Decision
		In such case Project manager should try to continue the project line supporting all the ethical factors but at the same time personal concerns should not be addressed while decision making.

Answer (b) -	Should Mountain keep or drop the Hiking shoe line? Support your answer with appropriate calculations
	Decrease in the Sale of Walking shoe line by 5%
		Before	After
	Selling Price	1,500,000.00	1,425,000.00	Decrease in sale by 5%
	(-)Variable Expense	600,000.00	570,000.00	Decrease in Variable cost by 5%
	Contribution Margin	900,000.00	855,000.00
	(-)Fixed Expense	440,000.00	440,000.00	Product related fixed expense will remain unchange
	Segment Margin	460,000.00	415,000.00
	(-)Common Fixed cost	150,000.00	250,000.00	When we consider only one line of project whole fixed cost will be allocated to that project i.e $100,000 + $150,000
	Net Income	310,000.00	165,000.00
	Earlier Income
	Hiking Shoe		(140,000.00)	Loss from Hiking shoe
	Walking Shoe		310,000.00	Income from Walking shoe
	Net Increase/(Decrease)		(5,000.00)	There is no overall increase in the income of the project, it's recommended to continue the project with Hiking Shoe.

Answer (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?
		Hiking Shoe	Walking Shoe	Total
	Selling Price	945,000.00	1,545,000.00	2,490,000.00
	(-)Variable Expense	567,000.00	618,000.00	1,185,000.00
	Contribution Margin	378,000.00	927,000.00	1,305,000.00
	(-)Fixed Expense	400,000.00	440,000.00	840,000.00
	Segment Margin	(22,000.00)	487,000.00	465,000.00
	(-)Common Fixed cost	100,000.00	150,000.00	250,000.00
		(122,000.00)	337,000.00	215,000.00
	(-)Advertisement Expense			50,000.00
	Net Income			165,000.00
	Earlier Income
	Hiking Shoe			(140,000.00)
	Walking Shoe			310,000.00
	Net Increase/(Decrease)			(5,000.00)	There is no overall increase in the income of the project, it's recommended to continue the project without incurring advertisement expense.

Answer (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?
		Canvas Slipper	Walking Shoe
	Selling Price	300,000.00	1,500,000.00
	(-)Variable Expense	170,000.00	600,000.00
	Contribution Margin	130,000.00	900,000.00
	(-)Fixed Expense	100,000.00	440,000.00
	Segment Margin	30,000.00	460,000.00
	(-)Common Fixed cost	50,000.00	200,000.00	Total Fixed expense are $250,000 if $50,000 allocated to canvas slipper the rest will be allocated to Walking shoes.
	Net Income	(20,000.00)	260,000.00
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