90.2K

Verified Solution

Link Copied!

Luke Corporation produces a variety of products, each within their own division. Last year, the managers at Luke developed and began marketing a new chewing gum, Bubbs, to sell in vending machines. The product, which sells for $5.80 per case, has not had the market success that managers expected and the company is considering dropping Bubbs.

The product-line income statement for the past 12 months follows:

Revenue $14,698,650

Costs

Manufacturing costs $14,445,895

Allocated corporate costs (@5%) 734,933 15,180,828

Product-line margin $(482,178)

Allowance for tax (@20%) 96,435

Product-line profit (loss) $(385,743)

All products at Luke receive an allocation of corporate overhead costs, which is computed as 5 percent of product revenue. The 5 percent rate is computed based on the most recent year's corporate cost as a percentage of revenue. Data on corporate costs and revenues for the past two years follow:

Corporate Revenue Corporate Overhead Costs

Most recent year $117,750,000 $5,887,500

Previous year 77,300,000 4,953,105

Roy O. Andre, the product manager for Bubbs, is concerned about whether the product will be dropped by the company and has employed you as a financial consultant to help with some analysis. In addition to the information given, Mr. Andre provides you with the following data on product costs for Bubbs:

Month Cases Production Costs

1 218,000 1,158,340

2 222,700 2,179,840

3 220,400 1,188,493

4 239,000 1,204,035

5 234,950 1,206,339

6 248,000 1,227,185

7 225,750 1,202,211

8 252,700 1,245,286

9 244,300 1,243,738

10 258,150 1,255,837

11 255,700 1,260,272

12 264,700 1,290,963

a.Bunk Stores has requested a quote for a special order of Bubbs. This order would not be subject to any corporate allocation (and would not affect corporate costs). What is the minimum price Mr. Andre can offer Bunk without reducing profit any further?(Round your answer to 2 decimal places.(i.e., 32.21))

minimum price___________per case?

b.How many cases of Bubbs does Luke have to sell in order to break even on the product?(Round variable cost percentage to 2 decimal places, fixed costs to whole dollar amount and profit per case to 3 decimal places for intermediate calculations. Round your final answer up to the nearest whole unit.)

number of cases ___________?

c.Suppose Luke has a requirement that all products have to earn 5 percent of sales (after tax and corporate allocations) or they will be dropped. How many cases of Bubbs does Mr. Andre need to sell to avoid seeing Bubbs dropped?(Round your minimum price per case to 2 decimal places and do not round your other intermediate calculations.Round your final answer up to the nearest whole unit.)

number of cases____________?

d.Assume all costs and prices will be the same in the next year. If Luke drops Bubbs, how much will Luke's profits increase or decrease? Assume that fixed production costs can be avoided if Bubbs is dropped.(Use variable cost percentage to 2 decimal places. Round intermediate calculations and final answer to nearest whole dollar amount.)

profits (increase/decrease) by __________?

Answer & Explanation Solved by verified expert

See Answer