Alberta Gauge Company, Ltd., a small manufacturing company in Calgary, Alberta, manufactures three types of electrical gauges used in a variety of machinery. For many years the company has been profitable and has operated at capacity. However, in the last two years, prices on all gauges were reduced and selling expenses increased to meet competition and keep the plant operating at capacity. Second-quarter results for the current year, which follow, typify recent experience. Alice Carlo, the company’s president, is concerned about the results of the pricing, selling, and production prices. After reviewing the second-quarter results, she asked her management staff to consider the following three suggestions: Discontinue the R-gauge line immediately. R-gauges would not be returned to the product line unless the problems with the gauge can be identified and resolved. Increase quarterly sales promotion by $100,000 on the Q-gauge product line in order to increase sales volume by 15 percent. Cut production on the E-gauge line by 50 percent, and cut the traceable advertising and promotion for this line to $20,000 each quarter. Jason Sperry, the controller, suggested a more careful study of the financial relationships to determine the possible effects on the company’s operating results of the president’s proposed course of action. The president agreed and assigned JoAnn Brower, the assistant controller, to prepare an analysis. Brower has gathered the following information. All three gauges are manufactured with common equipment and facilities. The selling and administrative expense is allocated to the three gauge lines based on average sales volume over the past three years. Special selling expenses (primarily advertising, promotion, and shipping) are incurred for each gauge as follows: Quarterly Advertising and Promotion Shipping Expenses Q-gauge $210,000 $10 per unit E-gauge 100,000 4 per unit R-gauge 40,000 10 per unit The unit manufacturing costs for the three products are as follows: Q-Gauge E-Gauge R-Gauge Direct material $ 31 $17 $ 50 Direct labor 40 20 60 Variable manufacturing overhead 45 30 60 15 15 10 20 Total $131 $77 $190 The unit sales prices for the three products are as follows: Q-gauge $200 E-gauge 90 R-gauge 180 The company is manufacturing at capacity and is selling all the gauges it produces. Use the operating data presented for Alberta Gauge Company and assume that the president’s proposed course of action had been implemented at the beginning of the second quarter. Then evaluate the president’s proposal by specifically responding to the following points. Are each of the three suggestions cost-effective? Support your discussion with an analysis that shows the net impact on income before taxes for each of the three suggestions. Was the president correct in proposing that the R-gauge line be eliminated? Explain your answer. Was the president correct in promoting the Q-gauge line rather than the E-gauge line? Explain your answer. Does the proposed course of action make effective use of the company’s capacity? Explain your answer. Are there any qualitative factors that Alberta Gauge Company’s management should consider before it drops the R-gauge line? Explain your answer.

Alberta Gauge Company, Ltd., a small manufacturing company in Calgary, Alberta, manufactures three types of electrical gauges used in a variety of machinery. For many years the company has been profitable and has operated at capacity. However, in the last two years, prices on all gauges were reduced and selling expenses increased to meet competition and keep the plant operating at capacity. Second-quarter results for the current year, which follow, typify recent experience. Alice Carlo, the company’s president, is concerned about the results of the pricing, selling, and production prices. After reviewing the second-quarter results, she asked her management staff to consider the following three suggestions: Discontinue the R-gauge line immediately. R-gauges would not be returned to the product line unless the problems with the gauge can be identified and resolved. Increase quarterly sales promotion by $100,000 on the Q-gauge product line in order to increase sales volume by 15 percent. Cut production on the E-gauge line by 50 percent, and cut the traceable advertising and promotion for this line to $20,000 each quarter. Jason Sperry, the controller, suggested a more careful study of the financial relationships to determine the possible effects on the company’s operating results of the president’s proposed course of action. The president agreed and assigned JoAnn Brower, the assistant controller, to prepare an analysis. Brower has gathered the following information. All three gauges are manufactured with common equipment and facilities. The selling and administrative expense is allocated to the three gauge lines based on average sales volume over the past three years. Special selling expenses (primarily advertising, promotion, and shipping) are incurred for each gauge as follows: Quarterly Advertising and Promotion Shipping Expenses Q-gauge $210,000 $10 per unit E-gauge 100,000 4 per unit R-gauge 40,000 10 per unit The unit manufacturing costs for the three products are as follows: Q-Gauge E-Gauge R-Gauge Direct material $ 31 $17 $ 50 Direct labor 40 20 60 Variable manufacturing overhead 45 30 60 15 15 10 20 Total $131 $77 $190 The unit sales prices for the three products are as follows: Q-gauge $200 E-gauge 90 R-gauge 180 The company is manufacturing at capacity and is selling all the gauges it produces. Use the operating data presented for Alberta Gauge Company and assume that the president’s proposed course of action had been implemented at the beginning of the second quarter. Then evaluate the president’s proposal by specifically responding to the following points. Are each of the three suggestions cost-effective? Support your discussion with an analysis that shows the net impact on income before taxes for each of the three suggestions. Was the president correct in proposing that the R-gauge line be eliminated? Explain your answer. Was the president correct in promoting the Q-gauge line rather than the E-gauge line? Explain your answer. Does the proposed course of action make effective use of the company’s capacity? Explain your answer. Are there any qualitative factors that Alberta Gauge Company’s management should consider before it drops the R-gauge line? Explain your answer.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter17: Activity Resource Usage Model And Tactical Decision Making

Section: Chapter Questions

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Alice Carlo, the company’s president, is concerned about the results of the pricing, selling, and production prices. After reviewing the second-quarter results, she asked her management staff to consider the following three suggestions:

Discontinue the R-gauge line immediately. R-gauges would not be returned to the product line unless the problems with the gauge can be identified and resolved.
Increase quarterly sales promotion by $100,000 on the Q-gauge product line in order to increase sales volume by 15 percent.
Cut production on the E-gauge line by 50 percent, and cut the traceable advertising and promotion for this line to $20,000 each quarter.

Jason Sperry, the controller, suggested a more careful study of the financial relationships to determine the possible effects on the company’s operating results of the president’s proposed course of action. The president agreed and assigned JoAnn Brower, the assistant controller, to prepare an analysis. Brower has gathered the following information.

All three gauges are manufactured with common equipment and facilities.
The selling and administrative expense is allocated to the three gauge lines based on average sales volume over the past three years.
Special selling expenses (primarily advertising, promotion, and shipping) are incurred for each gauge as follows:

	Quarterly Advertising and Promotion	Shipping Expenses
Q-gauge	$210,000	$10 per unit
E-gauge	100,000	4 per unit
R-gauge	40,000	10 per unit

The unit manufacturing costs for the three products are as follows:

	Q-Gauge	E-Gauge	R-Gauge
Direct material	$ 31	$17	$ 50
Direct labor	40	20	60
Variable manufacturing overhead	45	30	60
15	15	10	20
Total	$131	$77	$190

The unit sales prices for the three products are as follows:

Q-gauge	$200
E-gauge	90
R-gauge	180

The company is manufacturing at capacity and is selling all the gauges it produces.

Use the operating data presented for Alberta Gauge Company and assume that the president’s proposed course of action had been implemented at the beginning of the second quarter. Then evaluate the president’s proposal by specifically responding to the following points.
1. Are each of the three suggestions cost-effective? Support your discussion with an analysis that shows the net impact on income before taxes for each of the three suggestions.
2. Was the president correct in proposing that the R-gauge line be eliminated? Explain your answer.
3. Was the president correct in promoting the Q-gauge line rather than the E-gauge line? Explain your answer.
4. Does the proposed course of action make effective use of the company’s capacity? Explain your answer.
5. Are there any qualitative factors that Alberta Gauge Company’s management should consider before it drops the R-gauge line? Explain your answer.

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