4-54. Decision Whether to Add or Drop Carson Corporation produces and sells three products, Alpha, Beta, and Gamma, in a local market and in a regional market. At the end of the first cquarter of the curreat year, the following income statement (in thousands of dollars) has been preparod: Management has expressed special concern with the regional market because of the extremely poor return on sales. This market was entered a year ago becanse of excess capacity. It was originally believed that the return on sales would improwe with time, bat after a year, no noticeable improvement can be seen from the results as reported in the preceding quarterly statement. In attempting to decide whether to eliminate the regional market, the followiag information has been gathered: All administrative costs and fixed manafactering costs would not be affected by eliminating the regional market. Marketing costs that are not listed above as variable are fived for the period and separable by market. Fised marketing eosts assigned to the regional market would be saved if that market was eliminated. Regainad a. Assuming there are no aliernative uses for Carson's present capacity, would you recommend dropping the regional market? Why or why not? b. Prepare the quarterly income statement showing contribution margins by products. Do not allocate fived costs to products c. It is believed that a new product can be ready for sale next year if Carson decides to go ahead with contined research. The new peoduct would replace Gamma and can be produced by simply converting equipment presently usod in producing product Gismm. This comersion will increase fixed costs by $120,000 per quarter. What must be the minimum contribution margin per quarter for the new product to make the changeover financially feasible? (CMA adapred)
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