Alberta Gauge Company, Ltd., a small manufacturing company inCalgary, Alberta, manufactures three types of electrical gaugesused in a variety of machinery. For many years the company has beenprofitable and has operated at capacity. However, in the last twoyears, prices on all gauges were reduced and selling expensesincreased to meet competition and keep the plant operating atcapacity. Second-quarter results for the current year, whichfollow, typify recent experience.
| ALBERTA GAUGE COMPANY, LTD. |
| Income Statement |
| Second Quarter |
| (in thousands) |
| Q-Gauge | E-Gauge | R-Gauge | Total |
| Sales | | $ | 6,624 | | | | $ | 4,368 | | | | $ | 4,092 | | | | $ | 15,084 | | |
| Cost of goods sold | | | 4,339 | | | | | 3,738 | | | | | 4,319 | | | | | 12,396 | | |
| Gross margin | | $ | 2,285 | | | | $ | 630 | | | | $ | (227 | ) | | | $ | 2,688 | | |
| Selling and administrative expenses | | | 1,532 | | | | | 898 | | | | | 614 | | | | | 3,044 | | |
| Income before taxes | | $ | 753 | | | | $ | (268 | ) | | | $ | (841 | ) | | | $ | (356 | ) | |
| |
Alice Carlo, the company’s president, is concerned about theresults of the pricing, selling, and production prices. Afterreviewing the second-quarter results, she asked her managementstaff to consider the following three suggestions:
- Discontinue the R-gauge line immediately. R-gauges would not bereturned to the product line unless the problems with the gauge canbe identified and resolved.
- Increase quarterly sales promotion by $420,000 on the Q-gaugeproduct line in order to increase sales volume by 15 percent.
- Cut production on the E-gauge line by 50 percent, and cut thetraceable advertising and promotion for this line to $120,000 eachquarter.
Jason Sperry, the controller, suggested a more careful study ofthe financial relationships to determine the possible effects onthe company’s operating results of the president’s proposed courseof action. The president agreed and assigned JoAnn Brower, theassistant controller, to prepare an analysis. Brower has gatheredthe following information.
- All three gauges are manufactured with common equipment andfacilities.
- The selling and administrative expense is allocated to thethree gauge lines based on average sales volume over the past threeyears.
- Special selling expenses (primarily advertising, promotion, andshipping) are incurred for each gauge as follows:
| Quarterly Advertising
and Promotion | Shipping Expenses | |
| Q-gauge | | $ | 750,000 | | | | $ | 42 | | per unit | |
| E-gauge | | | 420,000 | | | | | 24 | | per unit | |
| R-gauge | | | 240,000 | | | | | 90 | | per unit | |
| |
- The unit manufacturing costs for the three products are asfollows:
| | Q-Gauge | | | E-Gauge | | | R-Gauge | |
| Direct material | | $ | 105.00 | | | | $ | 63.00 | | | | $ | 162.00 | | |
| Direct labor | | | 144.00 | | | | | 84.00 | | | | | 204.00 | | |
| Variable manufacturing overhead | | | 159.00 | | | | | 114.00 | | | | | 204.00 | | |
| Fixed manufacturing overhead | | | 63.63 | | | | | 72.75 | | | | | 126.61 | | |
| Total | | $ | 471.63 | | | | $ | 333.75 | | | | $ | 696.61 | | |
| |
- The unit sales prices for the three products are asfollows:
|
| Q-gauge | $ | 720 | |
| E-gauge | | 390 | |
| R-gauge | | 660 | |
|
- The company is manufacturing at capacity and is selling all thegauges it produces.
Required:
2. Use the operating data presented for AlbertaGauge Company and assume that the president’s proposed course ofaction had been implemented at the beginning of the secondquarter.
a. Calculate the net impact on income beforetaxes for each of the three suggestions.
b-1. Calculate contribution margin forR-gauge
b-2. Was the president correct in proposingthat the R-gauge line be eliminated?
c-1. Calculate the contribution perdirect-labor dollar for Q-gauge and E-gauge.
c-2. Was the president correct in promoting theQ-gauge line rather than the E-gauge line?
