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 $5.25 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 $ 14,682,150 Costs Manufacturing costs $ 14,440,395 Allocated corporate costs (@5%) 734,108 15,174,503 Product-line margin $ (492,353 ) Allowance for tax (@20%) 98,470 Product-line profit (loss) $ (393,883 ) 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 $ 106,750,000 $ 5,337,500 Previous year $ 76,200,000 4,221,000 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 above, Mr. Andre provides you with the following data on product costs for Bubbs: Month Cases Production Costs 1 207,000 $1,139,828 2 217,200 1,161,328 3 214,800 1,169,981 4 228,000 1,185,523 5 224,400 1,187,827 6 237,000 1,208,673 7 220,200 1,183,699 8 247,200 1,226,774 9 238,800 1,225,226 10 252,600 1,237,325 11 250,200 1,241,760 12 259,200 1,272,451 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? 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.
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 $5.25 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:
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|
|
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|
|
Revenue |
|
|
|
$ |
14,682,150 |
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|
Costs |
|
|
|
|
|
|
|
Manufacturing costs |
$ |
14,440,395 |
|
|
|
|
|
Allocated corporate costs (@5%) |
|
734,108 |
|
|
15,174,503 |
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|
Product-line margin |
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|
|
$ |
(492,353 |
) |
|
Allowance for tax (@20%) |
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|
|
|
98,470 |
|
|
Product-line |
|
|
|
$ |
(393,883 |
) |
|
|
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 |
$ |
106,750,000 |
$ |
5,337,500 |
|
|
Previous year |
$ |
76,200,000 |
|
4,221,000 |
|
|
|
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 above, Mr. Andre provides you with the following data on product costs for Bubbs:
|
Month |
Cases |
Production Costs |
|
1 |
207,000 |
$1,139,828 |
|
2 |
217,200 |
1,161,328 |
|
3 |
214,800 |
1,169,981 |
|
4 |
228,000 |
1,185,523 |
|
5 |
224,400 |
1,187,827 |
|
6 |
237,000 |
1,208,673 |
|
7 |
220,200 |
1,183,699 |
|
8 |
247,200 |
1,226,774 |
|
9 |
238,800 |
1,225,226 |
|
10 |
252,600 |
1,237,325 |
|
11 |
250,200 |
1,241,760 |
|
12 |
259,200 |
1,272,451 |
- 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?
- 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.
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