Question

Williams Products Inc. manufactures and sells a number of items, including school knapsacks. The company has been experiencing losses on the knapsacks for some time, as shown by the contribution format income statement below:

WILLIAMS PRODUCTS INC.
Income Statement—School Knapsacks
For the Quarter Ended June 30
Sales				$	285,000
Variable expenses:
Variable manufacturing expenses	$	79,800
Sales commissions		31,350
Shipping		8,550
Total variable expenses					119,700
Contribution margin					165,300
Fixed expenses:
Salary of product-line manager		11,000
General factory overhead		56,800	*
Depreciation of equipment (no resale value)		21,500
Advertising—traceable		53,600
Insurance on inventories		4,700
Purchasing department		33,160	↑
Total fixed expenses					180,760
Operating loss				$	(15,460	)

*Allocated on the basis of machine-hours.
^†Allocated on the basis of sales dollars.

     Discontinuing the knapsacks would not affect sales of other product lines and would have no noticeable effect on the company’s total general factory overhead or total purchasing department expenses.

Required:
a. Compute the increase or decrease of net operating income if the Williams Products Inc line is continued or discontinued. (Input all amounts as positive except Decreases in Sales, Decreases in Contribution Margin, and Net Losses which should be indicated by a minus sign.)

b. Would you recommend that the Williams Products Inc line be discontinued?

• Yes

• No

Answer 1

Requirement 1

Finantial Disadvantage

$   (96,000.00)

Requirement 2

No

It is not recommended to discontinue.

Working

Statement showing Finantial Advantage or (Disadvantage) of Discontinuing a product line
Sales		$ 285,000
Variable expenses
Variable Manufacturing Expenses	$ 79,800
Sales Commission	$ 31,350
Shipping	$ 8,550	$ 119,700
Contribution		$ 165,300
Avoidable Fixed Expenses
Advertisement Expenses	$ 53,600
Salary of Product line Manager	$ 11,000
Insurance on Inventories	$ 4,700
Total Avoidable Fixed Cost		$ 69,300
Net Benefit of continuing or Net disadvantage of discontinuing		$ 96,000

.

Notes:
1) Unavoidable Fixed Cost will not be considered because they will occur even if no production is done.
2) Depreciation is not considered since equipment has zero salvage value and depreciation is a non cash expense.
3) Similarly General factory overheads and Purchasing department expenses will continue to occur at same level that is why they are also excluded from calculation