A company is considering dropping one product line and give you the income statement for this...

Question:

A company is considering dropping one product line and give you the income statement for this product. Would you discontinue it if no other lines were affected?

Sales 150000

less: variable manufacturing expense (46000)

Sales commission (based on sales) (9000)

Freight (5000)

Contribution margin 90000

less: fixed expensed

Line manager for heavy metal CDs (2000)

General overhead (allocated-sq.ft.) (15000)

Depreciation of equipment (8000)

Advertising-direct (48000)

Purchasing dept. (allocated sales) (20000

General office (allocated sq.ft) (9000)

Net loss (12000)

Dropping a Product:

Allocated expenses are usually irrelevant in the decision of whether or not to drop a product, because a company cannot avoid its allocated costs if one product is discontinued, and they will simply decrease the profitability of other products.

Answer and Explanation:


The effect of dropping the product will be:

Loss in Product Contribution margin $(90,000)
Saving in avoidable fixed expenses:
Line manager for heavy metal CDs $2,000
General overhead
Allocated-sq.ft.so unavoidable
0
Depreciation of equipment
Allocated-sq.ft.so unavoidable
0
Advertising-direct 48,000
Purchasing dept.
Allocated-sq.ft.so unavoidable
0
General office
Allocated-sq.ft.so unavoidable
0
Decrease in profit if the product is dropped $40,000

I believe the product should NOT be discontinued



Learn more about this topic:

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Relevant Costs in Eliminating a Product or Segment

from Accounting 301: Applied Managerial Accounting

Chapter 9 / Lesson 12
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