manufactures three types of pumps used in a variety of applications

Ontario Pump Company, a small manufacturing company in Toronto, Ontario, manufactures three types of pumps used in a variety of applications. For many years the company has been profitable and has operated at capacity. However, in the last two years prices on all pumps 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.

ONTARIO PUMP COMPANY

Income Statement

Second Quarter

(in thousands)

R-Pump

F-Pump

S-Pump

Total

  Sales

$

5,525

$

3,360

$

3,245

$

12,130

  Cost of goods sold

3,619

2,875

3,425

9,919

  Gross margin

$

1,906

$

485

$

(180

)

$

2,211

  Selling and administrative expenses

1,278

691

487

2,456

  Income before taxes

$

628

$

(206

)

$

(667

)

$

(245

)

     Maria 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 S-Pump line immediately. S-Pumps would not be returned to the product line unless the problems with the pump can be identified and resolved.

•

Increase quarterly sales promotion by $350,000 on the R-Pump product line in order to increase sales volume by 15 percent.

•

Cut production on the F-Pump line by 50 percent, and cut the traceable advertising and promotion for this line to $85,000 each quarter.

     Justin 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.

•

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

  R-Pump

$

650

  F-Pump

320

  S-Pump

590

•

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

•

All three pumps are manufactured with common equipment and facilities.

•

The selling and administrative expense is allocated to the three pump lines based on average sales volume over the past three years.

•

Special selling expenses (primarily advertising, promotion, and shipping) are incurred for each pump as follows:

Quarterly Advertising
and Promotion

Shipping Expenses

  R-Pump

$

680,000

$

35

per unit

  F-Pump

350,000

17

per unit

  S-Pump

170,000

55

per unit

•

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

R-Pump

F-Pump

S-Pump

  Direct material

$

98.00

$

56.00

$

155.00

  Direct labor

130.00

70.00

190.00

  Variable manufacturing overhead

145.00

100.00

190.00

  Fixed manufacturing overhead

52.76

47.81

87.73

  Total

$

425.76

$

273.81

$

622.73

2.

Use the operating data presented for Ontario Pump Company and assume that the president's proposed course of action had been implemented at the beginning of the second quarter.

a.

Calculate the net impact on income before taxes for each of the three suggestions.

RPump, SPump, and FPump

Please explain your answers