Question

Gator Corporation manufactures several types of accessories. For the year, the gloves and mittens line had sales of $498,000, variable expenses of $365,000, and fixed expenses of $144,000. Therefore, the gloves and mittens line had a net loss of $11,000. If Gator eliminates the line, $43,000 of fixed costs will remain. Prepare an analysis showing whether the company should eliminate the gloves and mittens line. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Continue Eliminate Net Income Increase (Decrease) Sales $ $ $ Variable costs Contribution margin Fixed costs Net income / (Loss) $ $ $ The analysis indicates that Gator should the gloves and mittens line.

Answer 1

Here the Gator corporation wants to eliminate a line which is in loss , before taking the decision the corporation should analyse the effect of it on the future profitability.

In a general rule if the avoidable fixed cost exceeds the contribution lost then only the elimination of the activity is suggested otherwise it is better to keep the product continue even at loss as eliminating it will involve more costs and loss. This happens due to the effect of unavoidable fixed cost which will still be incurred even the product line is eliminated so the Gator corporation should analyse it as follows:

Here the contribution margin in the existing case is $ 133,000 ( 498000 - 365000) i.e sales - variable cost , which covers the fixed expenses of $ 144000 and put a net loss of $11000 . Here if the product is eliminated then the entire contribution margin will be lost as no sales, and still fixed cost of $ 43,000 will be incurred which is actually the additional loss of $ 32000 so it is advisable to not eliminate the gloves and mittens line.

The Analysis is as follows:

	Continue	Eliminate	Net Income Increase/ (Decrease)
Sales	498000	-	-498000
Less: Variable costs	-365000	-	365000
Contribution margin	133000	-	-133000
Less: Fixed cost	-144000	-43000	97000
Net Income / (Loss)	-11000	-43000	-32000

Eliminating the product line will involve the additional loss of $ 32000 , so the Gator corporation should not eliminate the gloves and mitten lines.