Case 2

Roxbury Manufacturing Company

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Roxbury Manufacturing Company is a privately owned business.Products manufactured by Roxbury had been doing very well until the year 2011. The last two years have seen a steady decline in sales and profit. If this declining trend continues, the company might come under financial distress. Income statements for the last two years are given below.

 

Mr.Creighton, the owner of the company is baffled that only a ten percent decline in sales has resulted in a twenty percent decline in profits. He asks you to explain to him how in spite of maintaining efficiency in operations by keeping variable expenses and contribution margin at the same percentage level, he has experienced a greater percentage decline in profits.

 

Case 3

Axelrod Company

 

Axelrod Company makes three types of t-shirts: Calm, Windy, and Gale. Mr. Brown, the general manager of the Company is disappointed with low sales and low profitability of Gale and is considering dropping the product. He believes that such a move will allow him to focus more attention to other profitable lines. He discusses this with you and asks for your opinion. You gather the following information about last year’s performance of the three products.

 

                                                            Clam                     Windy                   Gale
Units Sold                                          25,000                  18,750                  3,750

Selling Price/unit                              $30                       $32                       $39
Production cost:
Direct Materials/unit                      $10                       $10                       $15
Direct Labor/unit                             $14                       $14                       $21

There is no variable overhead. Annual total fixed overhead amounts to $168,000 and will remain the same whether the product line is dropped or retained. The fixed overhead rate established by the company was $3.60 per unit. The analysis provided to Mr. Brown on the basis of which he was considering to drop Gale from the line of products sold was as follows:

                                                           Clam                     Windy                   Gale
Selling Price/unit                              $30.00                  $32.00                  $39.00
Direct Materials/unit                      ($10.00)              ($10.00)               ($15.00)
Direct Labor/unit                             ($14.00)               ($14.00)              ($21.00)
Fixed Overhead/unit                       ($ 3.60)                ($ 3.60)                ($ 3.60)
Operating profit per unit                $2.40                    $4.40                   ($ 0.60)

Given the foregoing information, what advice will you give to Mr. Brown? Explain the conceptual reasoning behind your advice. Also provide numerical analysis to support your explanation.

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