Question

A Company is considering discontinuing one of their two poorest profit performers, namely the Shampoo product or the Diapers product. Using the data in the Condensed Income Statement: Create Discontinue Alternatives for both products and make a recommendation as to which product would be the best to discontinue and why?

Company XYZ

Condensed Income Statement

For the Year Ended December 31 20Y9

	Shampoo	Diapers
Sales	$2,750,000	$6,200,000
Cost of Goods Sold:
Variable Costs	$850,000	$4,250,000
Fixed Costs	$75,000	$100,000
Total cost of goods sold	$925,000	$4,350,000
Gross Profit	$1,825,000	$1,850,000
Operating Expenses:
Variable Costs	$1,875,000	$1,800,000
Fixed Costs	$50,000	$200,000
Total Operating Expenses	$1,925,000	$2,000,000
Income (Loss) from operations	($100,000) (A)	($150,000) (B)

Discontinue Alternatives:

	Continue Shampoo	Discontinue Shampoo	Differential Effect on Income
Sales
Costs:
Variable
Fixed
Income (Loss)			(C)

	Continue Diapers	Discontinue Diapers	Differential Effect on Income
Sales
Costs:
Variable
Fixed
Income (Loss)			(D)

If I discontinue Shampoo:

Annual Loss from Retaining Diapers (B)	($150,000)
Annual Loss from Discontinuing Shampoo (C)
Total Annual Loss

If I discontinue Diapers:

Annual Loss from Discontinuing Diapers (D)
Annual Loss from Retaining Shampoo (A)	($100,000)
Total Annual Loss

Which product would you recommend to discontinue and why?

Answer 1

Answer:

	Continue	Discontinue	Differential
	Shampoo	Shampoo	Effect on Income
Sales	$ 2,750,000	$              -	$         2,750,000
Costs:
Variable	$ 2,725,000	$              -	$         2,725,000
Fixed	$    125,000	$   125,000	$                       -
Income (Loss)	$ (100,000)	$ (125,000)	$              25,000
	Continue	Discontinue	Differential
	Diapers	Diapers	Effect on Income
Sales	$ 6,200,000	$              -	$         6,200,000
Costs:
Variable	$ 6,050,000	$              -	$         6,050,000
Fixed	$    300,000	$   300,000	$                       -
Income (Loss)	$ (150,000)	$ (300,000)	$            150,000

Table 2:

If I discontinue Shampoo:
Annual Loss from Retaining Diapers (B)	$(150,000)
Annual Loss from Discontinuing Shampoo (C)	$   (25,000)
Total Annual Loss	$(175,000)
If I discontinue Diapers:
Annual Loss from Discontinuing Diapers (D)	$(150,000)
Annual Loss from Retaining Shampoo (A)	$(100,000)
Total Annual Loss	$(250,000)

Conclusion:

Shampoo should be discontinued because the total loss in discontinuing shampoo is lower.

In case of any doubt, please feel free to comment.