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decision whether to add or drop carson corporation produces and sells three products 690959

Decision Whether to Add or Drop

Carson Corporation produces and sells three products, Alpha, Beta, and Gamma, in a local market and in a regional market. At the end of the first quarter of the current year, the following income statement (in thousands of dollars) has been prepared:

 

Total

Local

Regional

Sales revenue

$15,600

$12,000

$3,600

Cost of goods sold

12,120

9,300

2,820

Gross margin

$ 3,480

$ 2,700

$ 780

Marketing costs

1,260

720

540

Administrative costs

624

480

144

Total marketing and administrative

$ 1,884

$ 1,200

$ 684

Operating profits

$ 1,596

$ 1,500

$ 96

Management has expressed special concern with the regional market because of the extremely poor return on sales. This market was entered a year ago because of excess capacity. It was originally believed that the return on sales would improve with time, but after a year, no noticeable improvement can be seen from the results as reported in the preceding quarterly statement.

In attempting to decide whether to eliminate the regional market, the following information has been gathered:

 

Products

 

Alpha

Beta

Gamma

Sales revenue$6,000

$6,000

$4,800

$4,800

Variable manufacturing costs as a percentage of sales revenue

60%

70%

60%

Variable marketing costs as a percentage of sales revenue

3

2

2

           

 

Product Sales by Markets

Local

Regional

Alpha

$4,800

$1,200

Beta

3,600

1,200

Gamma

3,600

1,200

All administrative costs and fixed manufacturing costs would not be affected by eliminating the regional market. Marketing costs that are not listed above as variable are fixed for the period and separable by market. Fixed marketing costs assigned to the regional market would be saved if that market was eliminated.

Required

a. Assuming there are no alternative uses for Carson’s present capacity, would you recommend dropping the regional market? Why or why not?

b. Prepare the quarterly income statement showing contribution margins by products. Do not allocate fixed costs to products.

c. It is believed that a new product can be ready for sale next year if Carson decides to go ahead with continued research. The new product would replace Gamma and can be produced by simply converting equipment presently used in producing product Gamma. This conversion will increase fixed costs by $120,000 per quarter. What must be the minimum contribution margin per quarter for the new product to make the changeover financially feasible?

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