One of Eastvaco's business segments involves the manufacturing of three types of book binders. The profit margin on the binders have not met the expectations of the Company's CEO. He approaches the Plant Manager of the binder plant and asks for suggestions to improve the margin earned on binder sales. The Plant Manager explains to the CEO that increasing the sales price or sales quantity is not possible in such a highly competitive market. Therefore, a reduction in cost may be the only possibility.
The plant manager has the plant controller prepare a segment income statement for each of the three binders. The difference among the binders relates to quality.
- Binder A Binder B Binder C Total
- Sales Revenue (given in thousands) $500 $800 $150 $1,450
- Less Variable expenses 250 480 140 870
- Contribution Margin $250 $320 $ 10 580
- Less direct fixed expenses
- Advertising 10 10 10 30
- Salaries 37 40 35 112
- Depreciation 53 40 10 103
- Total $100 $ 90 $ 55 $ 245
- Segment margin $150 $ 230 $ (45) $ 335
- Less common fixed expenses $ 125
- Operating Income $ 210
The controller explains that if Binder C was discontinued then the supervisor (represents salaries) could be dismissed. Also, there would be no need for advertising Binder C.
1. Should Binder C be discontinued? Provide calculations to support your answer.
2. What other consideration(s) should the company consider before dropping Binder C?