Question

Problem 4 The Martha’s’s Dessert Company manufactures frozen gourmet desserts which are sold through grocery stores. One of the new products that the owner is particularly proud of is his new line of broccoli ice cream; which he thinks is the greatest dessert ever invented. Unfortunately, many of Martha’s customers do not share her enthusiasm. An income statement for Broccoli Ice Cream for last year is as follows: Sales $130,000 Cost of Goods Sold 122,400 Gross Profit 7,600 Operating Expenses 32,750 Loss ($25,150) Fixed costs are 25% of Cost of Goods Sold and 20% of Operating expenses. Because of the loss incurred, Martha is considering eliminating the Broccoli Ice Cream product line. Eliminating Broccoli Ice Cream will save the company $5,520 in fixed expenses. Prepare an analysis and recommendation regarding whether the Broccoli Ice Cream product line should be eliminated. Please base you recommendation on the financial information above rather than your personal like or dislike of Broccoli Ice Cream. Show your work in the space provided below.

Answer 1

Solution:

Cost of goods sold = $122,400

Variable COGS = $122,400 * 75% = $91,800

Fixed COGS = $122,400*25% = $30,600

Operating expenses = $32,750

Variable operating expenses = $32,750*80% = $26,200

Fixed operating expenses = $32,750*20% = $6,550

Total fixed cost = $30,600 + $6,550 = $37,150

Fixed cost to be incurred if product line discontinued = $37,150 - $5,520 = $31,630

Differential Analysis - Martha Desserts - Continue Broccoli Icecream (alt 1) or Close Broccoli Icecream (Alt2)
Particulars	Continue Broccoli Icecream (alt 1)	Discontinue Broccoli Icecream (alt 1)	Differential effect on income (Alt 2)
	Amount	Amount
Revenue	$130,000.00	$0.00	-$130,000.00
Costs:
Varaible COGS	$91,800.00	$0.00	-$91,800.00
Variable Operating Expenses	$26,200.00	$0.00	-$26,200.00
Fixed Cost	$37,150.00	$31,630.00	-$5,520.00
Income / (Loss)	-$25,150.00	-$31,630.00	-$6,480.00

As there is additional loss of $6,480 if product line discontinues, hence product line should be continued.