Question

Mr. Earl Pearl, accountant for Margie Knall Co., Inc., has prepared the following product-line income data:

			Product
	Total		A		B		C
Sales	$	109,000	$	49,000	$	25,000	$	35,000
Variable expenses		61,500		30,500		10,500		20,500
Contribution margin		47,500		18,500		14,500		14,500
Fixed expenses:
Rent		6,500		3,000		1,500		2,000
Depreciation		7,500		3,500		1,700		2,300
Utilities		5,050		2,500		550		2,000
Supervisors' salaries		6,050		2,000		550		3,500
Maintenance		3,600		2,000		650		950
Administrative expenses		11,500		3,500		2,500		5,500
Total fixed expenses		40,200		16,500		7,450		16,250
Net operating income	$	7,300	$	2,000	$	7,050	$	(1,750)

The following additional information is available:
	The factory rent of $2,000 assigned to Product C is avoidable if the product were dropped.
	The company's total depreciation would not be affected by dropping C.
	Eliminating Product C will reduce the monthly utility bill from $2,000 to $850.
	All supervisors' salaries are avoidable.
	If Product C is discontinued, the maintenance department will be able to reduce monthly expenses from $3,600 to $2,500.
	Elimination of Product C will make it possible to cut two persons from the administrative staff; their combined salaries total $3,500.

Required:
1.	Calculate the advantage or disadvantage in dropping Product C. (Input the amount as a positive value. Omit the "$" sign in your response.)

(Click to select)  Advantage  Disadvantage  in dropping Product C

$

2.	Should the product be dropped?
	Yes No

Answer 1

1)	Calculation of Financial Advantage / (Disadvantage) of dropping Product C
	Loss of Contribution margin on dropping product C	(14,500)
	Saving in factory rent	2,000
	Saving in monthly utility bill	1,150
	Saving of supervisor salary	3,500
	Saving in maintenance cost	1,100
	Saving in administrative salary	3,500
	Financial (Disadvantage)	(3,250)
2)	No, Product C should not be dropped
	(Because saving of cost is less than loss of contribution)