Question

Decision to Discontinue a Product

On the basis of the following data, the general manager of Foremost Footwear Inc. decided to discontinue Children’s Shoes because it reduced income from operations by $10,000. What is the flaw in this decision if it is assumed that fixed costs would not be materially affected by the discontinuance?

Foremost Footwear Inc. Product-Line Income Statement For the Year Ended April 30, 20Y7
	Children's Shoes			Men's Shoes			Women's Shoes			Total
Sales		$165,000			$300,000			$500,000		$965,000
Costs of goods sold:
Variable costs	$105,000	$150,000	$220,000	$475,000
Fixed costs	32,000	60,000	120,000	212,000
Total cost of goods sold	$137,000	$210,000	$340,000	$687,000
Gross profit	$28,000	$90,000	$160,000	$278,000
Selling and adminstrative expenses:
Variable selling and admin. expenses	$21,000	$45,000	$95,000	$161,000
Fixed selling and admin. expenses	17,000	20,000	25,000	62,000
Total selling and admin. expenses	$38,000	$65,000	$120,000	$223,000
Income (loss) from operations	$(10,000)	$25,000	$40,000	55,000

If the Children Shoe's are discontinued, the company's would by $.

Answer 1

Children's Shoes - Computation of Contribution and Loss
Particulars	Amount in $	Amount in $
Sales		165000
Less: Variable Costs:
1. Cost of Goods Sold	105000
2. Selling and admin expense	21000	126000
Contribution by Children's Shoes dept		39000
Less: Fixed Costs apportioned:
1. Cost of Goods Sold	32000
2. Selling and admin expense	17000	49000
Loss		-10000
The General Manager of Foremost Footwear inc was wrong in the assumption that if Children's Shoes is
discontinued, there would be increase in the income by $10,000.
As worked out above, though the loss is $10000 after apportionment of fixed costs, the contribution
made by Children's Shoes is $39000.
If Children's Shoes is discontinued, whole of fixed costs apportioned to Children's Shoes will have to be
apportioned between other products which will result in erosion of other products' profit to the extent
of $49000
Hence, the discontinuation of Children's shoes will not result in increase in income by $10000 but will
lead to decrease in the total income of Foremost Footwear inc by $39000 which was the contribution of Children's Shoes.