Ontario Pump Case

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ONTARIO PUMP COMPANY

Ontario Pump Company, a small manufacturing company in Toronto, manufactures three types of pumps used in a variety of machinery. For many years the company has been profitable and has operated at capacity. However, in the last two years, prices on all pumps were reduced and selling expenses increased to meet competition and keep the plant operating at capacity. Second-quarter results for the current year, which follows, typify recent experience.

ONTARIO PUMP COMPANY
Income Statement
Second Quarter
(in thousands)
R-PumpF-PumpS-Pump Total
Sales$4,800$2,700$2,700$10,200
Cost of goods sold 3,144 2,310 2,850 8,304
Gross margin$1,656$ 390$ (150)$ 1,896
Selling and administrative expenses 1,110 555 405 2,070 Income before taxes$ 546$ (165)$ (555)$ (174)

Maria Carlo, the company’s president, is concerned about the results of the pricing, selling, and production prices. After reviewing the second-quarter results, she asked her management staff to consider the following three suggestions:

Discontinue the S-Pump line immediately. S-Pumps would not be returned to the product line unless the problems with the pump can be identified and resolved. Increase quarterly sales promotion by $300,000 on the R-Pump product line in order to increase sales volume by 15 percent. Cut production on the F-Pump line by 50 percent, and cut the traceable advertising and promotion for this line to $60,000 each quarter.

Justin Sperry, the controller, suggested a more careful study of the financial relationships to determine the possible effects on the company’s operating results of the president’s proposed course of action. The president agreed and assigned JoAnn Brower, the assistant controller, to prepare an analysis. Brower has gathered the following information:

The unit sales price for the three products are:

B-Pump$600
F-Pump 270
S-Pump 540

...
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