This case deals with the practical implications of relevant costs for decision making, as discussed in

chapter 12. The costs in case exhibit 2, as reported for financial statement purposes, can differ
significantly from the costs that are relevant for managerial decisions. Your first job in this case is to
classify the costs of the three product lines into variable and fixed. The definitions of variable and
fixed costs appear in chapter 2 of our textbook, and are further discussed in chapters 3 and 4. Some
costs may be totally variable, some may be totally fixed, and some will be mixed with respect to
changes in production volume. These cost classifications have a significant impact on the budget, as
seen in chapter 8.
Instead of the questions in the case, please address the following questions adapted from the case:
1.Calculate the budgeted contribution margin and product profitability per unit of product for Grills A,
B and C. Which product is most profitable? If you were Wallace and Blanchard, and received these
estimates, how would that change the way you ran the company?
2. Redo the profit budget in case exhibit 1 (which was prepared using the traditional approach) by
using the contribution format of the income statement you learned in chap. 3 (see p. 97 of the
textbook for an example). Show the total operating income for the whole company, and show also
the revenues, costs and profitability by product line. For simplification purposes, ignore interest and
taxes in your analysis. Which format for the profit budget (traditional vs. contribution approaches)
would be more useful to the owners for decision making? Why? Give three examples of types of
decisions that the owners would make based on these estimates.
3. Suppose now that you are Richardson and that the owners asked you to prepare a budget
showing the impact on operating income (before interest and taxes) of the following four options:
3.1. drop Grill A, assuming its fixed costs are unavoidable and company SG&A, and other costs stay
the same;
3.2. reduce the price of Grill C to $75, which will bring an expected sales volume of 220,000 units for
Grill C, assuming no other changes;
3.3 change advertising focus so that Grill A sales drop by 10,000 units and Grill C sales increase by
10,000 units, assuming no other changes;
3.4 reduce the price of Grill C to $75, and change advertising focus so that Grill A sales drop by
10,000 units and Grill C sales increase by 30,000 units, assuming no other changes.

NOTE: clearly state your assumptions and show each step in your calculations.
Comparing alternatives 3.1 through 3.4 above, do you recommend that Wallace and Blanchard
implement any of those options? Why?
4. If the owners decide to implement option 3.2, what would the operating budget look like, using the
contribution format (starting from case Exhibit 1)?
5. Suppose that it is now January 2010. Overall, the actual operating results were better than
expected in the budget prepared in December 2008:

Product Grill A Grill B Grill C

Actual price $ 150 110 75
Actual sales (units) 115,000 110,000 225,000
In the role of Richardson, prepare an analysis of what gross margin should have been in 2009 (given
these actual sales volumes and prices) and compare it to the actual gross margin of $20,635,000.
Do the owners have reason to celebrate? Why?
HINT: prepare a revised budget starting from what you did in question 4, but using the actual prices
and sales volumes of 2009. Then compare this revised budget to the actual operat

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