Question

PROBLEM 1
The owner of the Red Mill Inn reviews gift shop sales on a monthly basis. Over the years,
certain items have been dropped from the shop because their sales provided insufficient
profit relative to the other gift shop items. Information for the past six months on three gift
shop items is in the table below.
		BAG OF	SWEET	STICKY
		MUFFINS	BREAD	BUNS
Sales		$2,160.00	$540.00	$2,880.00
Variable costs		$1,170.00	$256.50	$1,260.00
Contribution Margin		$990.00	$283.50	$1,620.00
Fixed costs		$480.00	$350.00	$600.00
Net Income		$510.00	($66.50)	$1,020.00

Question

25% of the fixed costs of each item are avoidable; the other 75% are not. Show calculations

to determine if Sweet Bread is profitable or not.

Answer 1

Total net income if sweet bread continue	1,464	See Note 1
Total net income if sweet bread discontinue	1,268	See Note 2
Loss of profit due to discontinuation	196
Decision: Sweet Bread is profitable
Note 1: Income Statement If sweet Bread continue
	BAG OF MUFFINS	SWEET BREAD	STICKY BUNS	Total
Sales	2,160	540	2,880	5,580
Variable costs	1,170	257	1,260	2,687
Contribution Margin	990	284	1,620	2,894
Fixed costs	480	350	600	1,430
Net Income	510	(67)	1,020	1,464
Note 2: Income Statement If sweet Bread discontinue
	BAG OF MUFFINS	SWEET BREAD	STICKY BUNS	Total
Sales	2,160		2,880	5,040
Variable costs	1,170		1,260	2,430
Contribution Margin	990		1,620	2,610
Fixed costs	480	263	600	1,343
Net Income	510	(263)	1,020	1,268