The Charlotte facility's supply of recycled materials may no longer support three product lines.
In addition , the following condensed quarterly income statement by product line has been provided. The General Manager of the Charlotte operations is concerned that envelopes is showing a $(15,000) loss. He is convinced that, regardless whether the Company can secure additional recycled materials, the envelope production should cease. The GM has asked you to prepare an analysis of the effect of discontinuing the production of envelopes.
Sales Total Envelopes Cups Packaging
Sales $1,100,000 $140,000 $500,000 $460,000
Variable Costs 510,000 60,000 200,000 250,000
Contribution Margin 590,000 80,000 300,000 210,000
Fixed Expenses:
Advertising 216,000 41,000 110,000 65,000
Depreciation 95,000 20,000 40,000 35,000
Product Line Supervisor 19,000 6,000 7,000 6,000
General Overhead 200,000 28,000 100,000 72,000
Total Fixed Expenses 530,000 95,000 257,000 178,000
Net Income (loss) $ 60,000 $ (15,000) $ 43,000 $ 32,000
Required:
Prepare a revised income statement assuming the envelope product line is eliminated. Assume that a pro rata amount of advertising is avoidable, product line supervisor salaries are avoidable, depreciation and general overhead are unavoidable.
Should envelopes be eliminated and explain your answer?
What role does opportunity cost have in this decision, explain?