Question

  Green Lawn Industries has three product lines of sprinklers that it manufactures: Oscillating, Rotary, and Traveling. The following is an income statement for each of the three product lines for the year ended December 31, 2019:

	Oscillating	Rotary	Traveling	Total
Sales	$375,000	$232,500	$300,000	$907,500
Cost of Goods Sold	(123,000)	(182,500)	(127,500)	(433,000)
Sales Commission	(33,000)	(32,500)	(30,000)	(95,500)
Contribution Margin	219,000	17,500	142,500	379,000
Advertising expense (specific to each individual segment)	(27,000)	(7,500)	0	(34,500)
General Fixed Operations Expense	(30,000)	(30,000)	(30,000)	(90,000)
Net income (loss)	$162,000	$(20,000)	$112,500	$254,500

Required:

1. What is the effect on Green Lawn Industries profitability if they eliminate the Rotary product line? Should Green Lawn Industries eliminate the Rotary product line?

2. Confirm your decision by preparing an income statement, assuming that the Rotary product line is eliminated.

Answer 1

a)Variable cost varies with number of units produced or sold thus it will not be incurred if product is not produced .Fixed cost remains constant and will be incurred whether product is manufactured or not unless avoidable.

	continue Rotary product	Discontinue
sales	232500	0
cost of goods sold	(182500)	0
sales commission	(32500)	0
contribution margin	17500	0
Advertising expense (specific to each individual segment)q	(7500)	avoided since specific to segment
General fixed cost	(30000)	(30000) [allocated cost]
Net income /(loss)	(20000)	(30000)

EFFECT :If Rotary product line is discontinued ,The total net income of Green lawn industries will decrease by 10000 as net loss from discontinuance of product line has increased from 20000 to 30000 [30000-20000=10000]

Effect = -10000

2)No,Rotary product line should not be discontinued.

3)

	Oscillating	Travelling	Total
sales	375000	300000	675000
cost of goods sold	-123000	-127500	-250500
sales commission	-33000	-30000	-63000
contribution margin	219000	142500	361500
Advertising expense (specific to each individual segment)q	-27000	0	-27000
General fixed cost	-45000	-45000	-90000
Net income /(loss)	147000	97500	244500

Decrease in total net income /(loss) after elimination of Rotary product line = 244500- 254500= -10000