Agnew Manufacturing produces and sells three models of a single product, Standard, Superior, and DeLuxe, 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 $ 7,800 $ 6,000 $ 1,800
Cost of goods sold 6,060 4,650 1,410
Gross margin $ 1,740 $ 1,350 $ 390
Marketing costs 630 360 270
Administrative costs 312 240 72
Total marketing and administrative $ 942 $ 600 $ 342
Operating profits $ 798 $ 750 $ 48
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
Standard Superior DeLuxe
Sales revenue $ 3,000 $ 2,400 $ 2,400
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
Standard $ 2,400 $ 600
Superior 1,800 600
DeLuxe 1,800 600
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 were eliminated.
Required:
a. Assuming there are no alternative uses for Agnew’s present capacity, would you recommend dropping the regional market?
Yes
No
b. Prepare the quarterly income statement showing contribution margins by products. Do not allocate fixed costs to products. (Enter your answers in thousands.)
c. It is believed that a new model can be ready for sale next year if Agnew decides to go ahead with continued research. The new product would replace DeLuxe and can be produced by simply converting equipment presently used in producing the DeLuxe model. This conversion will increase fixed costs by $60,000 per quarter. What must be the minimum contribution margin per quarter for the new model to make the changeover financially feasible? (Enter your answers in thousands.)