Alberta Gauge Company, LTD., a small manufacturing company in Calgary, Alberta, manufactures three types of electrical gauges used in a variety of machinery.  For many years the company has been profitable and has operated at capacity.  However, in the last two years, prices on all gauges were reduced and selling expenses increased to meet competition and keep the plant operating at capacity.  Second-quarter results for the current year, which follow, typify recent experience. Second Quarter Income Statement:   Q-Gauge (in thousands) E-Gauge (in thousands) R-Gauge(in thousands) Total(in thousands) Sales $1,600 $900 $900 $3,400 Cost of Goods sold $1,048 $770 $950 $2768 Gross margin $552 $130 $ (50) $632 Selling and administrative expenses $370 $185 $135 $690 Income before taxes $182 $(55) $(185) $(58) Alice Carlo, the company's president, is concerned about the results of the pricing, selling, and production prices.  After reviewing the second-quarter results, she asked her management staff to consider the following three suggestions: Discontinue the R-gauge line immediately. R-gauges would not be returned to the product line unless the problems with the gauge can be identified and resolved. Increase quarterly sales promotion by $100,000 on the Q-gauge product line in order to increase sales volume by 15 percent. Cut production on the E-gauge line by 50 percent, and cut the traceable advertising and promotion for this line to $20,000 each quarter. Jason Sperry, the controller, suggested a more careful study of the financial relationships to determine the possible effects on the company's operating results of the president's proposed course of action.  The president agreed and assigned JoAnn Brower, an assistant controller, to prepare an analysis.  Brower has gathered the following information. All three gauges are manufactured with common equipment and facilities. The selling and administrative expense is allocated to the three gauge lines based on average sales volume over the past three years. Special selling expenses (primarily advertising, promotion, and shipping) are incurred for each gauge as follows:   Quarterly Advertising and Promotion Shipping expense Q-gauge $210,000 $10 per unit E-gauge $100,000 $4 per unit R-gauge $40,000 $10 per unit The unit manufacturing costs for the three products are as follows:   Q-gauge E-gauge R-gauge Direct material $31 $17 $50 Direct labor $40 $20 $60 Variable manufacturing overhead $45 $30 $60 Fixed manufacturing overhead $15 $10 $20 Total $131 $77 $190 The unit sales prices for the three products are as follows: Q-gauge $200 E-gauge $90 R-gauge $180 The company is manufacturing at capacity and is selling all the gauges it produces. Use the operating data presented for Alberta Gauge Company and assume that the president's proposed course of action had been implemented at the beginning of the second quarter.  Then evaluate the president's proposal by specifically responding to the following. A) Was the president correct in proposing that the R-gauge line be eliminated?  Explain your answer.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question

Alberta Gauge Company, LTD., a small manufacturing company in Calgary, Alberta, manufactures three types of electrical gauges used in a variety of machinery.  For many years the company has been profitable and has operated at capacity.  However, in the last two years, prices on all gauges were reduced and selling expenses increased to meet competition and keep the plant operating at capacity.  Second-quarter results for the current year, which follow, typify recent experience.

Second Quarter Income Statement:

  Q-Gauge (in thousands) E-Gauge (in thousands) R-Gauge(in thousands) Total(in thousands)
Sales $1,600 $900 $900 $3,400
Cost of Goods sold $1,048 $770 $950 $2768
Gross margin $552 $130 $ (50) $632
Selling and administrative expenses $370 $185 $135 $690
Income before taxes $182 $(55) $(185) $(58)

Alice Carlo, the company's president, is concerned about the results of the pricing, selling, and production prices.  After reviewing the second-quarter results, she asked her management staff to consider the following three suggestions:

  • Discontinue the R-gauge line immediately. R-gauges would not be returned to the product line unless the problems with the gauge can be identified and resolved.
  • Increase quarterly sales promotion by $100,000 on the Q-gauge product line in order to increase sales volume by 15 percent.
  • Cut production on the E-gauge line by 50 percent, and cut the traceable advertising and promotion for this line to $20,000 each quarter.

Jason Sperry, the controller, suggested a more careful study of the financial relationships to determine the possible effects on the company's operating results of the president's proposed course of action.  The president agreed and assigned JoAnn Brower, an assistant controller, to prepare an analysis.  Brower has gathered the following information.

  • All three gauges are manufactured with common equipment and facilities.
  • The selling and administrative expense is allocated to the three gauge lines based on average sales volume over the past three years.
  • Special selling expenses (primarily advertising, promotion, and shipping) are incurred for each gauge as follows:
  Quarterly Advertising and Promotion Shipping expense
Q-gauge $210,000 $10 per unit
E-gauge $100,000 $4 per unit
R-gauge $40,000

$10 per unit

  • The unit manufacturing costs for the three products are as follows:
  Q-gauge E-gauge R-gauge
Direct material $31 $17 $50
Direct labor $40 $20 $60
Variable manufacturing overhead $45 $30 $60
Fixed manufacturing overhead $15 $10 $20
Total $131 $77 $190
  • The unit sales prices for the three products are as follows:
Q-gauge $200
E-gauge $90
R-gauge $180
  • The company is manufacturing at capacity and is selling all the gauges it produces.

Use the operating data presented for Alberta Gauge Company and assume that the president's proposed course of action had been implemented at the beginning of the second quarter.  Then evaluate the president's proposal by specifically responding to the following.

A) Was the president correct in proposing that the R-gauge line be eliminated?  Explain your answer.

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps

Blurred answer
Knowledge Booster
Income Statement Analysis
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education