Andres Company manufactures and sells three different products: Ex, Why and Zee. Projected income statements by product line for the year are presented below:
Ex
Why
Zee
Total
Unit sales
10,000
500,000
125,000
635,000
Sales revenue
$925,000
$1,000,000
$575,000
$2,500,000
Variable cost of units sold
285,000
350,000
150,000
785,000
Fixed cost of units sold
304,200
289,000
166,800
760,000
Gross margin
335,800
361,000
258,200
955,000
Variable non-manufacturing costs
270,000
200,000
80,000
550,000
Fixed non-manufacturing costs
125,800
136,000
78,200
340,000
Operating profit
($60,000)
$25,000
$100,000
$65,000
Production costs are similar for all three products. Fixed non-manufacturing costs are allocated to products in proportion to revenues. The fixed cost of units sold is allocated to products by various allocation bases, such as square feet for factory rent and machine hours for repairs.
Andres management is concerned about the loss on product Ex and is considering two alternative courses of corrective action.
Alternative A Andres would lease new machinery for the production of product Ex.
Management expects the new machinery would reduce variable production costs so total variable costs (cost of units sold and non-manufacturing costs) for product Ex would be 52% of product Ex revenues. The new machinery would increase total fixed costs allocated to product Ex from $430,000 to $480,000 per year. No additional fixed costs would be allocated to products Why or Zee.
Alternative B Andres would discontinue the manufacture of Product Ex. Selling prices of
Products Why and Zee would remain constant. Management expects Product Zee production and revenues would increase by 50%. The machinery devoted to Product Ex could be sold at scrap value that equals its removal costs. Removal of this machinery would reduce total fixed costs by $30,000 per year. The remaining fixed costs allocated to Product Ex include $155,000 of rent expense per year. The space previously used for Product Ex could be rented to an outside organization for $157,500 per year.
Required:
Prepare a schedule analyzing the effect of alternative A and alternative B on projected total operating profit.
