Question

Luke Corporation produces a variety of products, each within their own division. Last year, the managers at Luke developed and began marketing a new chewing gum, Bubbs, to sell in vending machines. The product, which sells for $6.00 per case, has not had the market success that managers expected and the company is considering dropping Bubbs. The product-line income statement for the past 12 months follows: $ 14,704,650 $ Revenue Costs Manufacturing costs Allocated corporate costs (25%) Product-line margin Allowance for tax (@20%) Product-line profit (loss) 14.447.895 735 233 $ 15,183,128 (478.478) 95,695 (382,783) $ All products at Luke receive an allocation of corporate overhead costs, which is computed as 5 percent of product revenue. The 5 percent rate is computed based on the most recent year's corporate cost as a parcentage of revenue. Data on corporate costs and revenues for the past two years follow: Most recent year Previous year Corporate Revenue $ 121,750,000 $ 77.700.000 Corporate Overhead Costs S6,087,500 5,109,590 Roy O. Andre, the product manager for Bubbs, is concerned about whether the product will be dropped by the company and has employed you as a financial consultant to help with some analysis. In addition to the information given above, Mr. Andre provides you with the following data on product costs for Bubbs: Month Cases 222.000 224,700 222,400 243.000 250,450 252,000 227,750 254,700 246,300 260,150 257,700 266,700 Production Costs $1,164.340 1,185,840 1,194,493 1,210,035 1,212,339 1,233,185 1,208,211 1,251,286 1,249,738 1,261,837 1,266,272 1,296,963

Answer 1

a)
	SUMMARY OUTPUT
	Regression Statistics
	Multiple R	0.91400386
	R Square	0.835403056
	Adjusted R Square	0.818943362
	Standard Error	16389.42803
	Observations	12
	ANOVA
		df	SS	MS	F	Significance F
	Regression	1	1.36E+10	1.36E+10	50.75446939	3.2E-05
	Residual	10	2.69E+09	2.69E+08
	Total	11	1.63E+10
		Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
	Intercept	687301.3722	76026.13	9.04033	3.97492E-06	517904.6	856698.2	517904.6	856698.2
	X Variable 1	2.215592511	0.310995	7.124217	3.20155E-05	1.522654	2.908531	1.522654	2.908531
The minimum price Mr. Andre can offer Bunk without reducing profit any further is equal to variable cost per unit	$               2.22
b)
High-low method:
Variable cost estimate = (Cost at highest activity – Cost at lowest activity)/(Highest activity – Lowest activity)
	Corporate Revenue	Corporate Overhead Costs
Most recent year	121,750,000	6,087,500
Previous year	77,700,000	5,109,590
Difference	44,050,000	977,910
Variable cost corporate estimate = 977,910/$44,050,000	2.22%	of revenue
Let Q be number of cases sold
Profit = Revenues - Variable Product Cost - Variable Corporate costs - Fixed Production Costs
Profit = $6 x Q - $2.22 x Q - ($6 Q x 2.22%) - $687301.37
Break Even Point (Q) = $687301.37/ $3.65	$    188,239.47	cases
c)
Profit = $6 x Q - $2.22 x Q - ($6 Q x 5%) - $687301.37
Break Even Point (Q) = $687301.37/ $3.48	120,579.19	cases
d)
Lost Revenue	-14,704,650
Product Cost Avoided	14,447,895
Loss Before corporate overhead savings	-256,755
Allocated corporate costs (2.22% x 14704650)	326,443
Increase profits before Tax	69,688
Allowance for tax (@20%)	13,938
Increased  Profits	55,751