Chapter 18, Problem 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.

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 launched.
• 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. 1. Calculate the ratio of gross profit to sales and the ratio of operating income to sales for each product.
2. 2. Write a brief (one-page) memo using the product profitability report and the calculations in (a) to make recommendations to management with respect to strategies for the three products.