Problem: Mr. Earl Pearl, Accountant for Margie Knall, Inc. has 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 following additional information is available:
- The factory rent of $1,500 assigned to product C is avoidable if the product were dropped.
- The company's total depreciation would not be affected by dropping C.
- Eliminating product C will reduce the monthly utility bill from $1,500 to $800.
- All supervisors' salaries are avoidable.
- If product C is discontinued, the maintenance department will be able to reduce monthly expenses from $3,000 to $2,000.
- Elimination of product C will make it possible to cut two persons from the administrative staff, currently, their combined salaries total $2,000.
Required: Prepare an analysis showing whether product C should be eliminated. Articulate your findings.