HANSON MANUFACTURING COMPANY

Question 1. If the company had dropped Product 103 as of January 1, 1974, what effect would that
actions have on the $160,000 profit for the first six months of 1974.

Quoted Selling price of 103 5.5

Discount offered 1.72%
Discounted Selling Price 5.41

Actual Sales 2710000

Loss 216000
No. of unit sold 501276

Cost price per unit 5.84

Variable Cost per cwt/unit (Direct Labour, Compensation

Insuracnce, Materials, Power, Supplies and Repairs) 2.62

Fixed Cost per cwt/unit (Rent,Property Taxes,property

insurance, indirect labour ,light and heat, building
services, selling expenses, general administrative,
interest, other income ,cash discount and depericaition) 3.23

Unit Contribution Margin 2.79

Fixed Cost 1617618
Total Contribution Margin of product 1397056
Current Profit 160000
Loss due to drop of product 1237056

Hence, the company will incur a loss. They should retain Product 103.

1. The current price of product 103 is $5.41/unit. Its fixed cost is $5.84/unit. The variable cost of
direct labour, compensation insurance, materials, power, supplies, and repairs is
$2.59865/unit. The fixed costs of rent, property taxes, property insurance, indirect labour,
light and heat, building service, selling expense, general administrative, interest, other income,
cash discount, and depreciation are $3.23/unit.
2. Thus the contribution margin = revenue-variable cost = $5.41-$2.62= $2.79/unit.
3. If the company stops producing the product 103, the variable cost would go away, but the fixed
cost would still remain, and the company would still have total fixed costs of $ 1617618.
4. Thus by dropping the product 103, we are just reducing the variable costs incurred due to this
product, but the fixed costs still remain.
 5. Therefore there would be a loss of 160000-(501276*2.79) =$1237056, should Hanson
and Company drop product 103.

Question 2 :
In January 1975, should the company have reduced the price of Product 101 from $4.90 to $4.50?

Variable Cost per cwt/unit (Direct Labour, Compensation Insurance,

Materials, Power, Supplies and Repairs) 2.0936
Contribution Margin at $4.9 2.8064

Contribution Margin at $4.5 2.4064

Volume at $4.9 750000

Volume at $ 4.5 1000000
Total Contribution at $4.9 2104800
Total Contribution at $4.5 2406400
Increase in Contribution 0.143292

Hence, company should reduce the price to $4.50 as it is increasing the profitability.

Question 3: Which is Hanson’s most profitable product in 1974?

101 102 103

Selling Price 4.9 5.16 5.5
Variable Cost 2.09 2.3538 2.62
Contribution
Margin 2.81 2.8062 2.88

Hence, Product 103 is the most profitable in 1974 by the way of contribution margin/unit.

In case of sales (volume) for the first six months:

Product 101:
2.81*996859 = 2801173.79
Product 102:
2.8062*712102 = 1998300.632
Product 103:
2.88*501276 = 1443674.88
Question 4. What appears to have caused the return to profitable operations in the first six months of
1974?

Product 101 Product 102 Product 103

Current Sales 6 months
1974 996859 712102 501276
yearly sales 2132191 1029654 986974
Previous year sale avg 6
months 73 1066096 514827 493487
Difference -69236.5 197275 7789

Though Paul Hanson suggested that the Product 103 be immediately dropped since they could not
sustain the losses incurred by this product, Wessling decided to wait and watch. Wessling asked for the
accounting statements to be redone using standard costs as the costs per cwt and made minor
marketing and production changes based on this modified accounting statements.
Using standard costs gave the correct costs of each of the products and hence the strategies based on
these costs yielded fruits, causing a return to profitable operations in the first six months of 1974