Question

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