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Pottery Unlimited has two product lines: cups and pitchers. Income statement dat for the most...

Question:

Pottery Unlimited has two product lines: cups and pitchers. Income statement dat for the most recent year follow:

Total Cups Pitchers
Sales revenue $460,000 $310,000 $150,000
Variable expenses 355,000 235,000 120,000
Contribution margin 105,000 75,000 30,000
Fixed expenses 76,000 38,000 38,000
Operating income (loss) $29,000 $37,000 $(8,000)

If $24424 in fixed costs will be eliminated by dropping the CUP line, how will operating income be affected?

Relevant Costs in Eliminating a Product:

Companies that deal with multiple products are often faced with a situation, where one or other products need to be discontinued. It is for the company to thoroughly evaluate the situation before it can decide upon the curtailing of its product line through differential analysis. Relevant costs must only be considered in the differential analysis for the alternatives available.

Answer and Explanation:


Computation of operating income (loss) for each of the three scenarios:


Both Pitchers & Cups Pitchers only Cups only
Sales revenue $460,000.00 150000 310000
Variable expenses 355000 120000 235000
Contribution margin 105000 30000 75000
Fixed expenses 76000 51576 51576
Operating income (loss) $29,000.00 -21576 23424


The total operating income, if both the product lines are continued = $29,000

The total operating income (loss) if only Pitchers are continued = -$21,756

The total operating income, if only Cups are continued = $23,424

Note:

It is given that if a product line is dropped, fixed costs will be reduced by $24,424.


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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