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 $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. Assume the product-line margin for Bubbs’ using the contribution margin approach is negative $300,000. If Luke allocates fixed corporate overhead at a rate of 1.36% of Revenues, what is Bubbs’ profit or loss after tax?

Answer 1