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:
$$
\begin{array}{|c|c|c|c|}
\hline & \text { Total } & \text { Local } & \text { Regional } \\
\hline \begin{array}{l}
\text { Sales revenue } \ldots \ldots \ldots \ldots \ldots \ldots \\
\text { Cost of goods sold } . \ldots \ldots \ldots \ldots \ldots
\end{array} & \begin{array}{r}
\$ 15,600 \\
12,120 \\
\end{array} & \begin{array}{r}
\$ 12,000 \\
9,300 \\
\end{array} & \begin{array}{r}
\$ 3,600 \\
2,820 \\
\end{array} \\
\hline \begin{array}{l}
\text { Gross margin } \ldots \ldots \ldots \ldots \ldots \ldots \\
\text { Marketing costs } \ldots \ldots \ldots \ldots \\
\text { Administrative costs } \ldots \ldots \ldots \ldots
\end{array} & \begin{array}{r}
\$ 3,480 \\
1,260 \\
624 \\
\end{array} & \begin{array}{r}
\$ 2,700 \\
720 \\
480 \\
\end{array} & \begin{array}{r}
\$ 780 \\
540 \\
144 \\
\end{array} \\
\hline \text { Total marketing and administrative. .. } & \$ 1,884 & \$ 1,200 & \$ 684 \\
\hline \text { Operating profits } \ldots \ldots \ldots \ldots \ldots & \$ 1,596 & \$ 1,500 & \$ 96 \\
\hline
\end{array}
$$
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 preceding quarterly statement.
In attempting to decide whether to eliminate the regional market, the following information has been gathered:
(TABLE CANT COPY)
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?
(CMA adapted)