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Brown Company makes three different types of pumps. The demand on its high$-$end model $($Model A$)$ has decreased, and Brown has had to reduce its sales price. Brown is now considering whether to discontinue this product and produce only the other products. Brown currently produces and sells $250$ units of each type of pump. They don$$t anticipate that demand for the other two models will change based on their decision. Brown uses full$-$absorption costing; manufacturing overhead is allocated based on direct labor hours.

Model A Model B Model C

Sales Price $($per unit$)$ $$1,159$ $$450$ $$475$

Units Produced $250250250$

Direct Labor Hours $($per unit$)50128$

Costs $($per unit$)$

Direct materials $$250$ $$200$ $$175$

Direct labor $$400$ $$80$ $$80$

MOH$*$ $$175,000$

$*$MOH $=$ Manufacturing Overhead

Jerry Brown, Brown$$s CEO, thinks that to discontinue Model A would save the company money, especially since this product line no longer meets his benchmark of $10$ percent gross margin by product line.

However, Brown$$s cost accountant just rushed in with a new analysis that shows only $50$ percent of total manufacturing overhead costs that are expected to go away if Model A is dropped will actually go away.

Answer the following questions:

Compute the current per$-$unit profitability of Models A$,$ B and C$.$

If Model A is discontinued, compute the per$-$unit profitability of Models B and C$,$ assuming only $50$ percent of the manufacturing overhead assigned to Model A goes away if Model A is dropped $($as the accountant indicates$).$ What is Jerry$$s course of action based on these numbers?

Hint: Calculate an overhead rate per direct labor hour and use this rate to compute overhead charged to the three models $($Overhead rate $=$ Total overhead$/$Total DL hours$).$ Compute profitability of each model. For Part $2,$ ignore Model A and repeat the calculations using a new overhead rate $($assuming $50\%$ of overhead assigned to Model A in the first part goes away$).$ The next element discusses the solution.

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