Reference no: EM132600489

RainRuler Stains produces a variety of exterior wood stains that have excellent coverage and longevity. In 2017, the company produced and sold 310,000 gallons of stain. There was no beginning inventory. Income for the year was as follows:

RainRuler Stains Income Statement For the Year Ended December 31, 2017

Sales $4,650,000

Less cost of goods sold 3,300,000

Gross profit 1,350,000

Less selling and administrative expenses:

Selling expense $870,000

Administrative expense 360,000 1,230,000

Net income $ 120,000

In the past, the company has marketed its product only to independent hardware stores in Oregon, Washington, and Idaho. Recently, however, Reggie Sherman, VP of marketing, has negotiated deals with several large construction companies. He estimates that these deals will increase annual sales by 70,000 gallons but at a reduced price of $12 per gallon. (The price in 2017 to hardware stores was $15 per gallon, and this will not be affected by the new deals.) At a recent meeting of the company's senior management team, Reggie presented a rough estimate of the financial impact of selling through the new channel: Additional sales (gallons) 70,000 Selling price per gallon $ 12.00 Incremental revenue $840,000 Gross profit per dollar of sales ($1,350,000 ÷ $4,650,000) 0.2903 Incremental profit $243,852 Since the incremental profit was more than two times as large as current net income, most of the managers present at the meeting expressed their hearty congratulations. Jennifer Jones, a summer intern and assistant to the company controller, Ed Flemming, thought Reggie's estimate was more than a little rough. After the meeting, she approached her boss and expressed her misgivings. "Ed, according to our previous discussions, fixed production costs related to rent, depreciation, and other items are about $1,362,500 per year. Reggie's analysis assumes that there aren't any fixed manufacturing overhead items.

And know our shipping costs, which are included in selling expense, are around $0.70 per gallon. Reggie's analysis assumes all selling expense is fixed. It's probably the case that almost all of our administrative expense is fixed, but that's clearly not accurate for selling expense. How about if recast our income statement in a contribution margin format-you know, using variable costing-and use that as a basis to estimate the impact of the new channel sales?" Ed quickly agreed to Jennifer's proposal.

Question 1. What is the situation at RainRuler Stains?

Question 2. What is the contribution margin ratio for sales in the new channel?

Question 3. What is the annual impact of sales in the new channel on profit?