Problem: XYZ Company has several products lines, all related to sports. The managers want you to determine whether they can save from dropping product A.
If they drop this product they could recover the investment in receivable and inventory related to the line and pay off debt of $100,000 that bears 12% interest.
The related data to product A is as follows:
Product A
Sales $220,000
Variable costs 160,000
Avoidable fixed costs 20,000
Non avoidable fixed costs 30,000
Investments that could be recovered from dropping product A $100,000
Interests 12%
Determine whether the company should drop the product, and explain your answer.