Douglas Corporation Produces and Sells Three Products Management Has Expressed Special Concern with the Regional Market Because

question 47

Essay

Douglas Corporation produces and sells three products.The three products,Alpha,Beta,and Gamma,are sold 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:
$$\begin{array} { | l | r | r | r | } \hline & \text { Total } & \text { Local } & \text { Regional } \\\hline \text { Sales revenue } & \$ 5,200 & \$ 4,000 & \$ 1,200 \\\hline \text { Cost of goods sold } & \underline { 4,040 } & \underline { 3,100 } & 940 \\\hline \text { Gross margin } & 1,160 & 900 & 260 \\\hline \text { Marketing costs } & 420 & 240 & 180 \\\hline \text { Administrative costs } & \underline { 208 } & \underline { 160 } & \underline { 48 } \\\hline \text { Operating profits } & \underline { \$ 532 } & \underline { \$ 500 } & \$ 32 \\\hline\end{array}$$
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 above quarterly statement.In attempting to decide whether to eliminate the regional market,the following information has been gathered:
$$\begin{array} { | l | r | r | r | } \hline \text { Procucts } & \text { Alpha } & \text { Beta } & \text { Gamma } \\\hline \text { Sales revenue } & \$ 2,000 & \$ 1,600 & \$ 1,600 \\\hline \text { Variable manufacturing } & 60 \% & 70 \% & 60 \% \\\text { cost \% of sales } & & & \\\hline \text { Variable marketing cost } & 3 \% & 2 \% & 2 \% \\\hline\end{array}$$
$$\begin{array} { | l | r | r | } \hline \text { Procuct Sales by Markets } & \text { Local } & \text { Regional } \\\hline \text { Alpha } & \$ 1,600 & \$ 400 \\\hline \text { Beta } & 1,200 & 400 \\\hline \text { Gamma } & 1,200 & 400 \\\hline\end{array}$$
All administrative costs and fixed manufacturing costs are common to the three products and the two markets and are fixed for the period.Remaining marketing costs are fixed for the period and separable by market.All fixed costs have been arbitrarily allocated to markets.Required:
(a. )Assuming there are no alternative uses for the Douglas Corporation'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 the Douglas Corporation decides to go ahead with continued research.The new product can be produced by simply converting equipment presently used in producing product Gamma.This conversion will increase fixed costs by $40,000 per quarter.What must be the minimum contribution margin per quarter be for the new product to make the changeover financially feasible?

Understand the concept of purchasing power parity and its implications for foreign-currency exchange.

Understand the role of interest rates in influencing international bond and assets markets.

Understand and describe the different forms and factors of social influence, including conformity, obedience, and compliance.

Identify and explain various techniques and tactics of persuasion and compliance, such as the foot-in-the-door technique, the lowball technique, and the scarcity principle.

---

Definitions:

Price of Labor

often refers to wages, which is the amount of money paid to workers for their services in production.

Price of Capital

The cost of using capital goods, which can be reflected in interest rates, rental rates, or the opportunity cost of using one's own capital.

South Africa

A country located at the southernmost tip of Africa, known for its diverse culture, languages, and landscapes, as well as its rich history.

Price of Beef

The amount of money required to purchase a specific quantity of beef in a market.