Managerial Accounts

640 Ghapter 14 Decislon lVaking: Relevant Costs and Beneftis

Required: In otderto maritrize the company's profitability" preparc an analysis that u'ill shori, rvhich product or products Spor1n,a1' Corporation should nranufacture or purchase.

l. First detemrine rvhich olSportrval's options nrakes the best use ol'its scarce resources. Hou' manv skateboards and tackle bores should lre nranufhcturcd'l Hori, many tackle boxes shoLrld be purchased')

2. CalculatetheimprovementinSportlval"stotal contributionr.narginilitadoptstheoptimalstrateg) rather than continuing rvith the status quo.

(ClVA, adapted)

Alberta Gauge Company, Ltd., a small manulacturing company in Calgary, Alberta, manufactures three types of electrical gauges used in a variety of machinery. For many yems the company has been profit- abie and lias operated at capacity. Howeveq 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 ior tlie current year, r.vhich follorv, typify recent experience.

s tu8..14-6:l Drop a Product Lrne

AIBEBTA GAUGE GO*IPA'IYI LIII. lncome Slatemenl

Second Quarls (in tfiousands)

$900 $ e00 $3 40c 77N 95C 2 /6A

Sa1es.................... ,, $1,600 Cost of 0oods sold j.q€ Gross $argin $ 552 Selling and adnrin strative sxper)ses .,............ 370 lncome before taxes ............ $ r 82

$t30

1 B-5

q€s)

-"r $* l 35 690

ql8s) q__e)

Shipp,ng Expenses

$10 per unit

4 per unit

10 per unit

Alice Carlo. the conrpany's prcsident. is concemed aborit lhc results olthe pricing. selling. and produclion prices. After rcvierving the second-i1uafler results. shc askecl her rnanagemcnt staff to consider the lbllou,ing tlree suggestions:

. Discontinue the R.-gauge line inrmediatell'. R-gauges would not be returnecl tci the product linc unless tlre problems rvith the gauge can be identified and resolr,ecl.

' Increase quarterlysalespromotiorrbl $100.000ontheQ-gaugsproductlineinorclertoincrease sales r.olume by 15 percent.

' Cul production on the E,-gauge line b1 50 percent. and cut the traceablc adveftising and pror.notion for this line to $20"00t) each quader.

Jason Sperrl. lhe contlrller suggested a rnore carefll study olthe llnimcial relationships to dcter- rninc the possible eflects on the company's operating results o1'the president's proposed course of action. The president agreed arrd assigned JoAnn Brou,cr. the assistant controller" to prcparc an anallsis. Ilror.ver has gathered the fbllorving inlbrmation.

. All three gauges are manufactured *'ith cornrrton equipntent and fhcilitics.

. The sclling and adnrinistrirtir,e erpense is allocated to the thrce gauge lines bascd on average salcs volume oler the past three years.

' Special selling erpenscs {pr:imarill advertising" promotion. and shipping) are incurrecl for each gauge as follou's:

{uaderly fleivedising arrd Prsm*ti$!

0-9au9e............... $210,000 E-9au9e......,.,,...,. 100,000 R-gauge .,......,..,... 40,000

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