Question

The following annual income statement is for Aramis Inc., a producer of large high-end canvases used for portraits. Management is concerned about the losses associated with the 24”x36” canvases (Product A) and is considering dropping this product line. Allocated fixed costs are assigned to product lines based on sales. If the company eliminates a product line, total allocated costs are assigned to the remaining product lines.  

	Product Lines			Total
	A 24”x36”	B 40”x30”	C 48”x36”
Sales Revenue	$400,000	$600,000	$250,000	$1,250,000
Variable Costs	(190,000)	(370,000)	(150,000)	(710,000)
Contribution Margin	$210,000	$230,000	$100,000	$540,000
Direct Fixed Costs	(196,000)	(162,500)	(50,000)	(408,500)
Allocated Fixed Costs	(24,000)	(36,000)	(15,000)	(75,000)
Operating Income (Loss)	($10,000)	$31,500	$35,000	$56,500

- If Aramis Inc. drops Product A, what would be the resulting Operating Income (Loss)? Present a revised schedule below. Should Aramis Inc. drop Product A? Provide support for the best decision from a quantitative standpoint.

-What are three qualitative factors management might consider in making this decision?

Answer 1

Aramis Inc.
Revised Schedule
	B	C	Total
	40"*30"	48"*36"
Sales Revenue	$      6,00,000	$      2,50,000	$      8,50,000
Variable Cost	$      3,70,000	$      1,50,000	$      5,20,000
Contribution Margin	$      2,30,000	$      1,00,000	$      3,30,000
Direct Fixed Cost	$      1,62,500	$          50,000	$      2,12,500
Allocated Fixed Cost	$          52,941	$          22,059	$          75,000
($75000 allocated on basis of sale)
Operation Income/(Loss)	$          14,559	$          27,941	$          42,500
No, company should not drop Product A as profit decreases by $14000
Three factors to be considered:-
1. Effect on Operating Profit
2. Curtailment of allocable fixed cost
3. Curtailment of direct fixed cost