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Homework answers / question archive / Mr
Mr. Earl Pearl, accountant for Margie Knall, Inc have prepared the following product-line income data:
| PRODUCT | ||||
|---|---|---|---|---|
| Total | A | B | C | |
| Sales | $100,000 | $50,000 | $20,000 | $30,000 |
| Variable expenses | $60,000 | $30,000 | $10,000 | $20,000 |
| Contribution margin | $40,000 | $20,000 | $10,000 | $10,000 |
| Fixed expenses: | ||||
| Rent | $5,000 | $2,500 | $1,000 | $1,500 |
| Depreciation | $6,000 | $3,000 | $1,200 | $1,800 |
| Utilities | $4,000 | $2,000 | $500 | $1,500 |
| Supervisors' salaries | $5,000 | $1,500 | $500 | $3,000 |
| Maintenance | $3,000 | $1,500 | $600 | $900 |
| Administrative expenses | $10,000 | $3,000 | $2,000 | $5,000 |
| Total fixed expenses | $33,000 | $13,500 | $5,800 | $13,700 |
| Net operating income | $7,000 | $6,500 | $4,200 | ($3,700) |
The additional information below is available:
-The factory rent of $1,500 assigned to Product C is avoidable if the product is dropped.
-The company's total depreciation would not be affected by dropping Product C.
-Eliminating Product C will reduce the total monthly utility bill from $4,000 to $3,000.
-All supervisory salaries for Product C would be avoidable.
-If Product C is discontinued, the maintenance department will be able to reduce total monthly expenses from $3,000 to $2,200.
-Elimination of Product C will make it possible to cut two persons from the administrative staff Currently, their combined salaries total $2,500.
Required:
Prepare an analysis showing whether Product C should be eliminated.
| Particulars | With C total | Without C total | |
|---|---|---|---|
| Sales | 100,000 | 70,000 (WN 1) | |
| Less: | Variable expense | 60,000 | 40,000 (WN 2) |
| Contribution margin (A) | 40,000 | 30,000 | |
| Fixed expenses: | |||
| Rent | 5,000 | 3,500 (WN 3) | |
| Add: | Depreciation | 6,000 | 6,000 |
| Add: | Utilities | 4,000 | 3,000 |
| Add: | Maintenance | 3,000 | 2,200 |
| Add: | Administrative expenses | 10,000 | 7,500 (WN 4) |
| Total fixed expenses (B) | 28,000 | 22,200 | |
| Net operating income ((C) = (A) - (B)) | 12,000 | 7,800 |
Working Notes:
1. Sales (Without C total) = 100,000 - 30,000 = $70,000
2. Variable expense (Without C total) = 60,000 - 20,000 = $40,000
3. Rent (Without C total) = 5,000 - 1,500 = $3,500
4. Administrative expenses (Without C total) = 10,000 - 2,500 = $7,500
Net income will increase = 12,000 - 7,800
Net income will increase = $4,200
Thus, it is advisable to eliminate Product C.
