Aquatic Line Company (ALC) manufactures a variety of strong and durable ropes. The company manufactures all their products in a large factory located near Nephi, Utah. All the types of ropes the company manufactures can be produced using the same machines in the factory. Workers can adjust the machines to produce the specific type of rope needed for production. ALC is reviewing the profitability of its products to understand if changes need to be made to its product portfolio. Product N3 is a heavy, durable rope used to secure ships when they dock. The following is the product-line contribution margin statement for the most recent year.

Revenue	$ 1,150,000
Variable Costs
Direct Material	$ 600,000
Direct Labor	$ 100,000
Variable Overhead	$ 150,000
Shipping	$ 85,000
Contribution Margin	$ 215,000
Fixed Costs
Rent	$ 50,000
Indirect Labor	$ 115,000
Marketing	$ 56,000
Operating Income	$ (6,000)

For the most recent year, ALC sold 10,000 yards of N3. The sales price of N3 is $115 per yard.

Management is concerned about the $6,000 operating loss for N3 and considering dropping the product line altogether and has asked you to analyze the choice to either keep N3 in the portfolio or drop the product.

If ALC drops N3, ALC will lose all the sales revenue associated with N3 but also save on all of the variable costs associated with N3. N3 is produced in a factory with other products, so total rent will not decrease even if N3 is dropped. Indirect labor includes the salaries and wages of product and factory supervisors. ALC expects 75% of the indirect labor costs associated with N3 to be eliminated if N3 is dropped because some of the supervisors oversee other products besides N3 and so will remain with the company. ALC expects 90% of the marketing costs with N3 to be eliminated if N3 is dropped.

Because dropping N3 will result in excess capacity in the factory, ALC has explored ways to utilize that capacity. N3 has found an outside textile manufacturing that would be willing to pay $88,000 a year to utilize ALC’s factory and machines to make their own products if N3 is dropped.

Finally, ALC has found that the purchase of N3 is somewhat correlated with the purchase of another rope product they manufacture, the N4. Therefore, ALC believes that the contribution margin of N4 will decrease by 20% if N3 is dropped. N4 had a total of $175,000 of contribution margin last year.

Should ALC drop N3?

Required: Prepare a differential analysis schedule in Excel comparing the status quo and alternative conditions. See Exhibit 4.8 in the textbook for an example of a differential schedule, but your schedule will not look exactly like that example. In your Excel file, identify which choice (keep or drop) you would suggest to the company. Submit your Excel file to the assignment link in the Project 2 folder.

Points breakdown:

• Appropriate set up of differential analysis schedule in Excel that identifies all of revenues and costs being considered: 25
• Correct application of differential analysis to show the revenues and costs differ between the two choices under consideration: 25

Answer rating: 100% (QA)

Aquatic Line Company ALC Differential analysis schedule Keep product Drop product Increase Decre... View the full answer