Chapter 18, Problem 18.3TIF

Communication

The controller of New Wave Sounds Inc. prepared the following product profitability report for management, using activity-based costing methods for allocating both the factory overhead and the marketing expenses. As such, the controller has confidence in the accuracy of this report.

	Home Theater Speakers	Wireless Speakers	Wireless Headphones	Total
Sales	$ 1,500,000	$1,200,000	$900,000	$3,600,000
Cost of goods sold	1,050,000	720,000	810,000	2,580,000
Gross profit	$ 450,000	$ 480,000	$ 90,000	$1,020,000
Marketing expenses	600,000	120,000	72,000	792,000
Income from operations	$ (150,000)	$ 360,000	$ 18,000	$ 228,000

In addition, the controller interviewed the vice president of marketing, who provided the following insight into the company's three products:

∎ The home theater speakers are an older product that is highly recognized in the marketplace.

∎ The wireless speakers are a new product that was just recently bunched.

∎ The wireless headphones are a new technology that has no competition in the marketplace, and it is hoped that they will become an important future addition to the company’s product portfolio. Initial indications are that the product is well received by customers.

The controller believes that the manufacturing costs for all three products are in line with expectations.

Based on the information provided:

1. Calculate the ratio of gross profit to sales and the ratio of income from operations to sales for each product.

2. Write a brief (one page) memo using the product profitability report and the calculations in (1) to make recommendations to management with respect to strategies for the three products.