Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Accounting Basics Expert

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.

ALBERTA GAUGE COMPANY, LTD.
Income Statement
Second Quarter
(in thousands)
Q-Gauge E-Gauge R-Gauge Total
Sales .................................................................................. $1,600 $900 $ 900 $3,400
Cost of goods sold .............................................................. 1,048 770 950 2,768
Gross margin ...................................................................... $ 552 $130 $ (50) $ 632
Selling and administrative expenses ..................................... 370 185 135 690
Income before taxes ............................................................ $ 182 $ (55) $(185) $ (58)

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
Fixed manufacturing overhead .......................................................... 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.

Required:
1. JoAnn Brower says that Alberta Gauge Company's 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. prepare a memo to Alberta Gauge's president that addresses the following points.
a. describe 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 describe why it is better.
2. 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.
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? describe your answer.
c. Was the president correct in promoting the Q-gauge line rather than the E-gauge line? describe your answer.
d. Does the proposed course of action make effective use of the company's capacity? describe your answer.
3. Are there any qualitative factors that Alberta Gauge Company's management should consider before it drops the R-gauge line? describe your answer.

 

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M941721

Have any Question? 


Related Questions in Accounting Basics

Nbspcomplete all requirements which are listed

COMPLETE ALL REQUIREMENTS WHICH ARE LISTED BELOW. REQUIREMENT #1: During its first month of operation, the View Corporation, a construction company which specializes in home remodeling,                                    ...

Dexter company charges to expense all equipment that costs

Dexter Company charges to expense all equipment that costs $25 or less. What concept supports this policy?

Q1 harbour cruises limited started business on 1 july 2015

Q1. Harbour Cruises Limited started business on 1 July 2015 and completed its first statement of comprehensive income and first statement of financial position on 30 June 2016. The statements are prepared before consider ...

Essay objectivethe objective of this case study is to

Essay Objective: The objective of this case study is to understand Australian Conceptual Framework in accounting standard setting and in business practices. Discussions: You should select a company listed on the Australi ...

Practice questionswhy is a balance sheet claimed to be a

Practice questions: Why is a balance sheet claimed to be a statement of the financial position of a business? What limitations do you think it has?

Practice questionsindicate which of the following costs

Practice questions: Indicate which of the following costs that are incurred in a manufacturing company are production costs, selling and distribution costs or administration costs: • Motor vehicles' licences • Depreciati ...

Question 1 ali goes to the bank to take out a personal loan

Question 1: Ali goes to the bank to take out a personal loan. The stated annual interest rate is 12%, but interest is compounded monthly and he will make monthly payments. The effective annual interest rate (EAR) of the ...

Determining adjusting entries and tracingtheir effects to

Determining Adjusting Entries and Tracing Their Effects to Financial Statements Tim Angel opened a small travel agency. At the end of its second year of operation, Angel Travel, Inc., had the trial balance shown below. A ...

Describe the differences between a profit and loss account

Describe the differences between a profit and loss account and a cash flow statement.

The morgan family lives in massachusetts they moor their

The Morgan family lives in Massachusetts. They moor their sailboat in Rhode Island. What might be a plausible reason for the possible inconvenience? Is the breadth and number of Federal excise taxes increasing or decreas ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

A cola-dispensing machine is set to dispense 9 ounces of

A cola-dispensing machine is set to dispense 9 ounces of cola per cup, with a standard deviation of 1.0 ounce. The manuf

What is marketingbullwhat is marketing think back to your

What is Marketing? • "What is marketing"? Think back to your impressions before you started this class versus how you

Question -your client david smith runs a small it

QUESTION - Your client, David Smith runs a small IT consulting business specialising in computer software and techno

Inspection of a random sample of 22 aircraft showed that 15

Inspection of a random sample of 22 aircraft showed that 15 needed repairs to fix a wiring problem that might compromise

Effective hrmquestionhow can an effective hrm system help

Effective HRM Question How can an effective HRM system help facilitate the achievement of an organization's strate