Question

Giant Company has three products, A, B, and C. The following information is available: Product A Product B Product C Sales $70,000 $97,000 $23,000 Variable costs 37,000 51,000 15,000 Contribution margin 33,000 46,000 8,000 Fixed costs: Order and delivery costs 10,000 20,000 2,000 Allocated corporate costs 7,000 12,000 9,400 Operating income $16,000 $14,000 $ (3,400) Delivery and ordering costs are avoidable costs. a. Do you recommend discontinuing the Product C line? Why or why not? b. What additional factors should the top management of Giant Co. consider before making a decision of discontinuing Product C line? c. If the product B line had been discontinued, corporate profits for the current year would have decreased by what amount?

Answer 1

ANSWER
Question a) Do you recommend discontinuing the Product C line? Why or why not?
	PRODUCT	PRODUCT	PRODUCT	TOTAL
	A	B	C	(A+B+C)
	Amt in $	Amt in $	Amt in $	Amt in $
SALES	70000	97000	23000	190000
VARIABLE COST	37000	51000	15000	103000
% of Variable cost to sales ( Variable cost/Sales X 100)	52.86%	52.58%	65.22%	54.21%
CONTRIBUTION MARGIN	33000	46000	8000	87000
% of Margin on Sales ( Margin/Sales X 100)	47.14%	47.42%	34.78%	45.79%
FIXED COST
Order and Delivery cost (A)	10000	20000	2000	32000
Allocated corporate costs (B)	7000	12000	9400	28400
TOTAL FIXED COST (A + B)	17000	32000	11400	60400
% of Fixed cost (Total Fixed cost/Sales X 100)	24.29%	32.99%	49.57%	31.79%
OPERATING INCOME	16000	14000	-3400	26600
% of Operating Income (Total Operating Income/Sales X 100)	22.86%	14.43%	-14.78%	14.00%
1) If Product C discontinued - the corporate cost of $ 9400 is to be allocated to Product A & B
Order and delivery cost of Product C need not tobe considered since it is an avoidable cost
`    (hint is given in the question itself)
Total Operation Income of Product A & B ( 16000 + 14000)	30000
Less: The Allocable corporate cost of Product C	9400
NET OPERATING INCOME IF PRODUCT C DISCOUNTINED	20600
Sale of Product A and B	167000
% of Operating Income	12%
If Product C discountined the Total operating income of the company will be reduced from $26600 to $ 20600, which amount to 2% drop of overall operating income of the company.
Further the allocable fixed cost of $ 9400 is absorbed by Product C.   Hence discontinuing product C is not recommendable
ANS to Question b) What additional factors should the top management of Giant Co. consider before making a decision of discontinuing Product C line? .
1) It is stated that the Ordering and delivery cost are avoidable cost. Hence if this cost avoided S 2000 of product C can be saved and the Operating income can be improved to - $1400s
2) Whether sale can be improved to to $ 33000 so that the contibution margin will cover the fixed cost and there will be overall increase in the total operating income
3) Can the variable cost of Product C be reduced to cover the loss
Anw to Question c) If the product B line discontinued, corporate profits for the current year would have decreased by what amount?
If Product line is discounted the profitablity will be as follows
	PRODUCT	PRODUCT	TOTAL
	A	C	(A+C)
	Amt in $	Amt in $	Amt in $
SALES	70000	23000	93000
VARIABLE COST	37000	15000	52000
% of Variable cost to sales ( Variable cost/Sales X 100)	52.86%	65.22%	55.91%
CONTRIBUTION MARGIN	33000	8000	41000
% of Margin on Sales ( Margin/Sales X 100)	47.14%	34.78%	44.09%
FIXED COST
Order and Delivery cost (A)			12000
Allocated corporate costs (B)			28400
TOTAL FIXED COST (A + B)			40400
% of Fixed cost (Total Fixed cost/Sales X 100)			43.44%
OPERATING INCOME			600
% of Operating Income (Total Operating Income/Sales X 100)			0.65%
If Product B discounted the profit will decrease from $ 26600 to $ 600
Since the Order and delivery cost is avoidable this cost is not considered under fixed cost in the above calculation
If Order and delivery cost of Product B considered under Fixed cost the Operating income will be
Operating Income without considering Order & delivery cost of Product B	$	600
Less: Order and delivery cost to be allocated to Product A & C		$	12000
OPERATING INCOME		$	-11400