Question

this problem is killing me. think i am missing a critical part that is affecting everything downstream.

Accessories-R-Us is a wholesaler that markets and sells mobile phone accessories to retailers. Lately, it’s Controller, Frank Beamer, noticed that the demand for their standard product-line has been declining. In an effort to get ahead of the issue, Frank had his staff prepared the following schedule:

Accessories-R-Us
Contribution Income Statement
For Month Ending August 31, 2019
	Discount	Standard	Premium	Total
Monthly unit sales	9,500	8,000	11,000	28,500
Sales	$76,000	$88,000	$148,500	$312,500
Less: Variable Costs	56,050	78,000	121,000	255,050
Less: Allocated Fixed Costs	10,667	8,982	12,351	32,000
Income before taxes	$9,283	$1,018	$15,149	$25,450

Note: Fixed costs are allocated to each product-line based on unit sales.

According to Mr. Beamer and the marketing and sales team, the results above are representative of the past 24 months or so. In fact, the company’s 18-month forecasts are less “rosy”, particularly with respect to the Standard line.

Required

(For all of the options below, show the analysis supporting your recommendation)

Mr. Beamer asks you to provide analysis and recommendations on each of the following options:

1. Discontinuing the Standard product with the assumption that Premium and Discount sales will increase, 20% and 10%, respectively.
2. Retaining all 3 product lines, but increasing the advertising and promotion budget by $12,000 per month with the goal of increasing unit sales for each, as follows:
   1. Discount increases 12%
   2. Standard increases 15%
   3. Premium increases 12%

Note: Advertising and promotion is a fixed cost.

3. Ignoring proposals, A and B above, one of the company’s analysts recommends the company continue the Standard product-line without any changes, at this time.
   1. Based on your analysis, do you agree with this observation? Why or why not, include support from your analysis? (Consider Standard’s contribution margin, operating leverage, and other key metrics.)

Answer 1

Please give positive ratings so I can keep answering. Thanks!

Accessories-R-Us
Current Contribution Income Statement
	Discount	Standard	Premium	Total
Monthly unit sales	9,500.00	8,000.00	11,000.00
Sales	76,000.00	88,000.00	148,500.00	312,500.00
Less: Variable Costs	56,050.00	78,000.00	121,000.00	255,050.00
Contribution	19,950.00	10,000.00	27,500.00	57,450.00
Less: Fixed Costs				32,000.00
Income before taxes	19,950.00	10,000.00	27,500.00	25,450.00
Answer A
Premium sales will increase by 20%. We know variable cost is proportionate to sales. So contribution will also increase by 20%.
Discount sales will increase by 10%. We know variable cost is proportionate to sales. So contribution will also increase by 10%.
Contribution Income Statement
	Discount		Premium	Total
Contribution	23,940.00		33,000.00	56,940.00
Less: Fixed Costs				32,000.00
Income before taxes	23,940.00		33,000.00	24,940.00
Decrease in Income before taxes by				510.00
Income before taxes will decrease by $ 510 so this proposal should not be accepted.
Note: Fixed cost will be same and will not be reduced even if Standard Product is discontinued.
Answer B
Discount sales will increase by 12%. We know variable cost is proportionate to sales. So contribution will also increase by 12%.
Standard sales will increase by 15%. We know variable cost is proportionate to sales. So contribution will also increase by 15%.
Premium sales will increase by 12%. We know variable cost is proportionate to sales. So contribution will also increase by 12%.
Contribution Income Statement
	Discount	Standard	Premium	Total
Contribution	22,344.00	11,500.00	30,800.00	64,644.00
Less: Fixed Costs				32,000.00
Less: Advertising and promotion				12,000.00
Income before taxes	22,344.00	11,500.00	30,800.00	20,644.00
Decrease in Income before taxes by				4,806.00
Income before taxes will decrease by $ 4,806 so this proposal should not be accepted.
Note: Fixed cost will be same and will not be reduced even if Standard Product is discontinued.
Answer C
Ignoring proposals, A and B above, one of the company’s analysts recommends the company continue the Standard product-line without any changes, at this time.
Yes its true. Both Proposal A and B results in less net profits then present situation. So Standard Product should not be discontinued at all.