Question - Dropping a Product Line
Pantheon Gaming, a computer enhancement company, has three product lines: audio enhancers, video enhancers, and connection-speed accelerators. Common costs are allocated based on relative sales. A product line income statement follows:
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Pantheon Gaming Income Statement For the Year Ended December 31, 2011
|
|
Audio
|
Video
|
Accelerators
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Total
|
|
Sales
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$1,045,000
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$2,255,000
|
$2,200,000
|
$5,500,000
|
|
Less cost of goods sold
|
575,000
|
1,240,000
|
1,870,000
|
3,685,000
|
|
Gross margin
|
470,000
|
1,015,000
|
330,000
|
1,815,000
|
|
Less other variable costs
|
56,900
|
70,700
|
24,900
|
152,500
|
|
Contribution margin
|
413,100
|
944,300
|
305,100
|
1,662,500
|
|
Less direct salaries
|
158,100
|
177,700
|
68,200
|
404,000
|
|
Less common fixed costs:
|
|
|
|
|
|
Rent
|
11,970
|
25,830
|
25,200
|
63,000
|
|
Utilities
|
4,370
|
9,430
|
9,200
|
23,000
|
|
Depreciation
|
5,890
|
12,710
|
12,400
|
31,000
|
|
Other administrative costs
|
79,230
|
170,970
|
166,800
|
417,000
|
|
Net income
|
$153,540
|
$547,660
|
$23,300
|
$724,500
|
Since the profit for accelerator devices is relatively low, the company is considering dropping this product line.
Determine the impact on profit of dropping accelerator products.