Question

Fashion design Company Ltd. sells clothing. The store sells dresses, skirts and blouses.

Financial Statement information for the clothing is as follows –

                                                                        Dresses                       Skirts               Blouses

Sales Revenue                                               300,000                       250,000           600,000

Variable costs                                                 170,000                       200,000           300,000

Contribution Margin                                        130,000                         50,000           300,000

Fixed costs                                                        80,000                         60,000           120,000

Net Income                                                     50,000                       (10,000)           180,000

Unavoidable fixed costs of $150,000 were allocated to the garments based on their respective sales revenues.

Required –

a. The Management Accountant, Ms. Peters is considering stopping the production and sale of skirts. If skirts are dropped, sales of dresses will increase by 20 percent and sales of blouses will drop by 15 percent. Should skirts be dropped?

b. Ignoring part a, suppose pants could also be produced and sold. If pants are introduced there will be no impact on the sale of dresses but the sale of blouses will increase by 10%. The sales of pants will be 15% higher than those of skirts.

The contribution margin ratio of the pants will be 30%. The avoidable fixed costs of the pants will be the same as those of skirts. Should pants replace skirts?

c. What will be the overall impact on profit on the decision taken in part b of the question?

d. Identify both quantitative and qualitative considerations to be made by a company before elimination of a product line.

Answer 1

Working for fixed cost
Particulars	Dresses	Skirts	Blouses	Total
Sales	$                  300,000.00	$                  250,000.00	$                  600,000.00	$                 1,150,000.00
Variable cost	$                  170,000.00	$                  200,000.00	$                  300,000.00	$                     670,000.00
Contribution margin	$                  130,000.00	$                    50,000.00	$                  300,000.00	$                     480,000.00
Less: Avoidable Fixed expense	$                          40,870	$                          27,391	$                          41,739	$                           110,000
Less: Unavoidable Fixed expense	$                          39,130	$                          32,609	$                          78,261	$                           150,000
Net income/(Loss)	$                          50,000	$                        (10,000)	$                        180,000	$                           220,000
a) Dropping skirts will result into decrease in net income from $220,000 to $178,391 , therefore skirts should not be dropped
Particulars	Dresses	Skirts	Blouses	Total
Sales	$                  360,000.00	$                                    -	$                  510,000.00	$                     870,000.00
Variable cost	$                  204,000.00	$                                    -	$                  255,000.00	$                     459,000.00
Contribution margin	$                  156,000.00	$                                    -	$                  255,000.00	$                     411,000.00
Less: Avoidable Fixed expense	$                          40,870	$                                    -	$                          41,739	$                             82,609
Less: Unavoidable Fixed expense	$                          62,069	$                                    -	$                          87,931	$                           150,000
Net income/(Loss)	$                          53,061	$                                    -	$                        125,330	$                           178,391
b) Dropping skirts & producing pants will result into increase in net income from $220,000 to $286,250 , therefore skirt should be dropped and Pant should be produced.
Particulars	Dresses	Pants	Blouses	Total
Sales	$                  300,000.00	$                  287,500.00	$                  660,000.00	$                 1,247,500.00
Variable cost	$                  170,000.00	$                  201,250.00	$                  330,000.00	$                     701,250.00
Contribution margin	$                  130,000.00	$                    86,250.00	$                  330,000.00	$                     546,250.00
Less: Avoidable Fixed expense	$                          40,870	$                          27,391	$                          41,739	$                           110,000
Less: Unavoidable Fixed expense	$                          36,072	$                          34,569	$                          79,359	$                           150,000
Net income/(Loss)	$                          53,058	$                          24,290	$                        208,902	$                           286,250
c) Overall profit will increase from $220,000 to $286,250 if skirt is dropped and pant is produced.