Chapter 26, Problem 26.4CP

Using a product profitability report to guide strategic decisions

The controller of Boom Box 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 indicated that the floor loudspeakers were an older product that was highly recognized in the marketplace. The ribbon loudspeakers were a new product that was recently launched. The ribbon loudspeakers are a new technology that have 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.

	Floor Loudspeakers	Bookshelf Loudspeakers	Ribbon Loudspeakers	Totals
Sales	$ 1,500,000	$ 1,200,000	$900,000	$3,600,000
Less 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
Less marketing expenses	600,000	120,000	72,000	792,000
Income from operations	$ (150,000)	$360,000	$ 18,000	$ 228,000

1. 1. Calculate the gross profit and income from operations to sales ratios for each product.
2. 2. Write a memo using the product profitability report and the calculations in (I) to make recommendations to management with respect to strategies for the three products.