Question

Following are sales and other operating data for the three products made and sold by Marine Enterprises:

Product
	A	B	C	Total
Sales	$150,000	$90,000	$240,000	$480,000
Manufacturing costs:
Fixed	$ 15,000	$25,000	$ 30,000	$ 70,000
Variable	120,000	35,000	134,000	289,000
Selling and administrative expenses:
Fixed	5,000	30,000	10,000	45,000
Variable	2,500	5,000	6,000	13,500
Total costs	$142,500	$95,000	$180,000	$417,500
Net income (loss)	$ 7,500	$(5,000)	$ 60,000	$ 62,500

In view of the net loss shown for Product B, company management is considering dropping that product. All variable costs are direct costs and would be eliminated if Product B were dropped; all fixed costs are indirect costs and would not be eliminated. Assume that the space used to produce Product B would be left idle. Would you recommend the elimination of Product B? Give supporting computations

Answer 1

It is recommended that Product B should not be dropped.

Income statement assuming Product B is dropped
Product
	A	B	C	Total
Sales	$ 150,000.00		$ 240,000.00	$ 390,000.00
Manufacturing costs:				$                 -
Fixed	$   15,000.00	$ 25,000.00	$   30,000.00	$   70,000.00
Variable	$ 120,000.00		$ 134,000.00	$ 254,000.00
Selling and administrative expenses:				$                 -
Fixed	$     5,000.00	$ 30,000.00	$   10,000.00	$   45,000.00
Variable	$     2,500.00		$     6,000.00	$     8,500.00
Total costs	$ 142,500.00	$ 55,000.00	$ 180,000.00	$ 377,500.00
Net income (loss)	$     7,500.00	$ (55,000.00)	$   60,000.00	$   12,500.00

If product B is dropped Overall decrease in net income will be for $ 50,000.

Net income is decreasing because even though Division B is making loss but still it is bringing Contribution of $50000 which will be lost if Product B is dropped. Fixed cost is unavoidable for B which is the reason why Product B should not be dropped.