Question

QuestionManufacturing Company, a small manufacturing company in Toronto,manufactures 3
typesof pumps used in a variety of applications. For many years thecompany has been
profitable and has operated at capacity. However, in the last twoyears prices on all pumps were
reduced and selling expenses increased to meet competition and keepthe plant operating at
capacity. Second-quarter results for the current year, whichfollow, typify recent experience.
ABCMANUFACTURING COMPANY
IncomeStatement
2nd quarter
(inthousands)
	R-Pump	F-Pump	S-Pump	Total
Sales	$4,800	$2,700	$2,700	$10,200
COGS	3,144	2,310	2,850	8,304
Gross Margin	$1,656	$390	$(150)	$1,896
Selling, Admin& other expenses	1,110	555	405	2,070
Income before thetaxes	$546	$(165)	$(555)	$(174)
Robo,the company's president, is concerned about the results. Afterreviewing the second-
quarter results she asked her management staff to consider thefollowing 3 suggestions:
1) Discontinue the S-Pump line immediately.S-Pump would not be returned to the product line
unlessthe problems with the pump can be identified and resolved.
2) Increase quarterly sales promotion by $300,000on the R-Pump product line in order to
increase salesvolume by 15%.
3) Cut production on the F-Pump line by 50%, andcut the traceable advertising and promotion
forthis line to $60,000 each quarter.
Nobo,the controller, suggested a more careful study of the financialrelationships to determine
thepossible effects on the company's operating results of thepresident's proposed course of
action. The president agreed and assigned Sobo, the assistantcontroller, to prepare an analysis.
Sobohas gathered the following information:
- The unit sales prices for the 3 pumps are asfollows:
R-Pump $600
F-Pump $270
S-Pump $540
- The company is manufacturing at capacity and isselling all the pumps it produces.
- All 3 pumps are manufactured with commonequipment and facilities.
-Theselling, admin and other expense is allocated to the 3 pump linesbased on average sales
volume over thepast 3 years.
-Special (avoidable) selling expenses (primarily advertising,promotion, and shipping) are
incurred for eachpump as follows:
Quarterly Advertising & Promotion ShippingExpenses
R-Pump	$630,000		$30 per unit
F-Pump	$300,000		12 per unit
S-Pump	$120,000		30 per unit
- Theunit manufacturing costs for the 3 pumps are		as follows:
	R-Pump	F-Pump	S-Pump
DM	$93	$51	$150
DL	120	60	180
VariableManufacturing OH	135	90	180
FixedManufacturing OH	45	30	60
Total	$393	$231	$570
Required:
(i)Sobo says that ABC Manufacturing Company's product-line incomestatement for
the2nd quarter is not suitable for analyzing proposals and makingdecisions such as
the ones suggestedby Robo.
a) Explain why the product-line income statementas presented is not suitable for analysis
and decisionmaking.
b) Describe and prepare an alternativeincome-statement format that would be more
suitable for analysis and decision making, and explain why it isbetter. (7 marks)
(ii)Use the operating data presented by Question Manufacturing Companyand assume that the
president's proposed course of action had been implemented at thebeginning of the second
quarter. Then evaluate the president's proposal by specificallyresponding to the following
points:
a) Are each of the 3 suggestions cost-effective?Support your discussion with an
theanalysis that shows that net impact on income before taxes for eachof the 3
suggestions.
b) Was the president correct in proposing thatthe S-Pump line is eliminated? Explain
your answer.
c) Was the president correct in promoting theR-Pump line rather than the F-Pump line?
Explain your answer.
d) Does the proposed course of action makeeffective use of the company's capacity?
Explain your answer.

Need help with question 2a,b,c,d