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zeting a new chewing gum success that managers exp -line income statement for

zeting a new chewing gum success that managers exp -line income statement for

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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 $6.00 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 $ 14,784,658e Costs Manufacturing costs Allocated corporate costs (@5%) Product-line margin Allowance for tax (@20%) Product-line profit (loss) $ 14,447,895 735,233 15,183,128 (478,478) 95,695 (382,783) All products at Luke receive an allocation of corporate overhead costs, which is computed as 5 percent of product revenue. The 5 computed based on the most recent year's corporate cost as a percentage of revenue. Data on corporate costs and percent rate revenues for the past two years follow: Most recent year Previous year Corporate Revenue $ 121,750, e0 77,700, e00 Corporate Overhead Costs $ 6,887,500 5,109,590 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 222,000 224, 700 222,400 243,000 250,450 252,000 227,750 254, 700 246, 300 260,150 257,700 266, 780 $1,164, 340 1,185,840 1,194,493 1,210,035 1,212,339 1,233,185 1,208, 211 1,251, 286 1,249,738 1,261, 837 1,266, 272 1, 296,963 1 2 4 5 7 9 10 11 12 Requlred: 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? b. How many cases of Bubbs does Luke have to sell in order to break even on the product? 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? 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. Complete this question by entering your answers in the tabs below. Required A Required B Required C Required 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
Transcribed Image Text: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 $6.00 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 $ 14,784,658e Costs Manufacturing costs Allocated corporate costs (@5%) Product-line margin Allowance for tax (@20%) Product-line profit (loss) $ 14,447,895 735,233 15,183,128 (478,478) 95,695 (382,783) All products at Luke receive an allocation of corporate overhead costs, which is computed as 5 percent of product revenue. The 5 computed based on the most recent year's corporate cost as a percentage of revenue. Data on corporate costs and percent rate revenues for the past two years follow: Most recent year Previous year Corporate Revenue $ 121,750, e0 77,700, e00 Corporate Overhead Costs $ 6,887,500 5,109,590 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 222,000 224, 700 222,400 243,000 250,450 252,000 227,750 254, 700 246, 300 260,150 257,700 266, 780 $1,164, 340 1,185,840 1,194,493 1,210,035 1,212,339 1,233,185 1,208, 211 1,251, 286 1,249,738 1,261, 837 1,266, 272 1, 296,963 1 2 4 5 7 9 10 11 12 Requlred: 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? b. How many cases of Bubbs does Luke have to sell in order to break even on the product? 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? 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. Complete this question by entering your answers in the tabs below. Required A Required B Required C Required 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
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