MA77 Problem: Relevant Costing – Drop a Product Line - Andres Company

MA77 Problem: Relevant Costing – Drop a Product Line - Andres Company

Andres Company manufactures and sells three different products: Ex, Why, and Zee. Projected incomestatements by product line for the year are presented below:

 Ex Why Zee Total 

Unit sales 10,000 500,000 125,000 635,000Sales revenue $925,000 $1,000,000$575,000 $2,500,000Variable cost of units sold 285,000 350,000 150,000 785,000Fixed cost of units sold 304,200 289,000 166,800 760,000Gross margin 335,800 361,000 258,200 955,000Variable nonmanufacturing costs 270,000 200,000 80,000 550,000Fixed nonmanufacturing costs 125,800 136,000 78,200 340,000Operating profit $(60,000) $ 25,000 $100,000 $ 65,000 Production costs are similar for all three products. Fixed non-manufacturing costs are allocated to products in proportion to revenues. The fixed cost of units sold is allocated to products by variousallocation bases, such as square feet for factory rent and machine-hours for repairs.Andres management is concerned about the loss on product Ex and is considering two alternative coursesof corrective action.

 Alternative A

. Andres would lease some new machinery for the production of product Ex. Managementexpects that the new machinery would reduce variable production costs so that total variable costs (cost of units sold and non manufacturing costs) for product Ex would be 52 percent of product Ex revenues. Thenew machinery would increase total fixed costs allocated to product Ex from $430,000 to $480,000 per year. No additional fixed costs would be allocated to products Why or Zee.

 Alternative B

. Andres would discontinue the manufacture of product Ex. Selling prices of products Whyand Zee would remain constant. Management expects that product Zee production and revenues wouldincrease by 50 percent. The machinery devoted to product Ex could be sold at scrap value that equals itsremoval costs. Removal of this machinery would reduce total fixed costs by $30,000 per year. Theremaining fixed costs allocated to product Ex include $155,000 of rent expense per year. The space previously used for product Ex can be rented to an outside organization for $157,500 per year.

 Required – 

Prepare a schedule analyzing the effect of alternative A and alternative B on projected total operating profit.