Question

Luke Corporation produces a variety of products, each within their own division. Last year, the managers...


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 $5.25 per case, has not had the market success that managers expected, and the company is considering dropping Bubs.

The product-line income statement for the past 12 months follows:

Table 1

Revenue

$14,682,150

Costs

Manufacturing costs

$14,440,395

Allocated corporate costs

734,108

15,174,503

Product-line margin

$ (492,353)

Allowance for tax (@20%)

98,470

Product-line profit (loss)

$ (393,883)

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 percentage of revenue. Data on corporate costs and revenues for the past two years follow:


Table 2

Corporate Revenue

Corporate Overhead Costs

Most recent year

$106,750,000

$5,337,500

Previous year

$76,200,000

$4,221,000

  Assume the fixed corporate overhead is $1,454,000 in each year. None of these fixed costs are specifically traceable to Bubbs.

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 Bubs:

Table 3

Monthly Production and Production Costs

Month

Cases

Prod. Costs

1

207,000

1,139,828

2

217,200

1,161,328

3

214,800

1,169,981

4

228,000

1,185,523

5

224,400

1,187,827

6

237,000

1,208,673

7

220,200

1,183,699

8

247,200

1,226,774

9

238,800

1,225,226

10

252,600

1,287,325

11

250,200

1,241,760

12

259,200

1,272,451

  

Table 4 - Regression Analysis of Table 3 Data

Adjusted R-squared               0.957

Variable

Coefficient

t

p>|t|

Significance

Std Err

Units

2.236

15.71

< .001

***

0.1423

Constant

682,300

20.53

<.001

***

33,246

QUESTION: Assume the variable allocated corporate costs are $0.192 per case of Bubbs. What is the monthly average number of cases of Bubbs that Lukes sold last year? Round to the nearest whole number.

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