11 May DOES THE PROPOSED COURSE OF ACTION MAKE EFFECTIVE USE OF THE COMPANYS CAPACITY?
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 companys operating results of the presidents 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 PromotionShipping ExpensesQ-gauge210,000$10 per unitE-gauge100,0004 per unitR-gauge40,00010 per unitThe unit manufacturing costs for the three products are as follows:Q-GaugeE-GaugeR-GaugeDirect material311750Direct labor402060Variable manufacturing overhead453060Fixed manufacturing overhead151020Total13177190 The unit sales prices for the three products are as follows:Q-gauge200E-gauge90R-gauge180 The company is manufacturing at capacity and is selling all the gauges it produces.Required:1. JoAnn Brower says that Alberta Gauge Companys product-line income statement for the second quarter is not suitable for analyzing proposals and making decisions such as the ones suggested by Alice Carlo. Write a memo to Alberta Gauges president that addresses the following points.a. Explain why the product-line income statement as presented is not suitable for analysis and decision making.b. Describe an alternative income statement format that would be more suitable for analysis and decision making, and explain why it is better.2. Use the operating data presented for Alberta Gauge Company and assume that the presidents proposed course of action had been implemented at the beginning of the second quarter. Then evaluate the presidents proposal by specifically responding to the following points.a. 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.b. Was the president correct in proposing that the R-gauge line be eliminated? Explain your answer.c. Was the president correct in promoting the Q-gauge line rather than the E-gauge line?Explain your answer.d. Does the proposed course of action make effective use of the companys capacity?Explain your answer.3. Are there any qualitative factors that Alberta Gauge Companys management should consider before it drops the R-gauge line? Explain your answer.
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