Question

Cool Rays Ltd. is considering dropping its Tinted Glass product line. The Tinted Lens product line income statement for the last year was as follows:

The company has a total of 3 product lines. Only $200,000 of fixed manufacturing costs can be eliminated if the Tinted Lens product line is discontinued.   The balance of the fixed manufactured costs have been allocated to the product line on the basis of sales.  

Should Cool Rays drop the Tinted Glass product line? By how much would operating income increase or decrease if the product line is dropped? Show your work.

Irrespective of your calculation above, very briefly list two other considerations that should influence senior management’s decision in decisions of this type?

Regardless of your answer above, assume the company would lose $200,000 if the Tinted Lens product line were dropped. Also assume that if the Tinted Glass product line was dropped the company could introduce a new product line Z, which is quite unique in the market place. The following information relates to this possibility:

Sales of product line Z                                    $1,000,000

Variable manufacturing costs                          50% of selling price

Sales commissions                                         10% of selling price

Required advertising for product line Z           $75,000

The amount allocated to product line Z for fixed manufacturing expenses and head office expenses would remain the same.

Required: Should the company drop the Tinted Lens product line and introduce the new product line Z? (There is insufficient capacity to sell both product lines.) By how much will operating income increase or decrease if the company discontinues the Tinted glass product line and introduces Z? Show your work.

Answer 1

	Sales			1850000
	Less : Variable costs
	Manufacturing portion			1080000
	Commissions @10% on sales			185000
	Total variable costs			1265000
	Contribution margin			585000
	Specific fixed cost which can be avoided if Tinted Glass Product Line is discontinued			200000
Requirement	Operating Income which will be decreased if we decide to drop the Tinted Glass Product Line			385000
Requirement	The two other consideration that should influence the decision
	of senior management.
	1.     Once the product line is dropped, the competitors will
	usurp the market share of the company which will be difficult
	to get back, if company wants to starts selling this product line
	again.
	2.      If the product line is dropped, labor has to be retrenched.
	If it happens, the company might find it difficult to get them again.
	Sales of Product Z			1000000
	Variable costs of Product Z
		Manufacturing costs		500000
		Sales commissions		100000
	Total variable costs			600000
	Contribution Margin			400000
	Specific fixed costs			75000
	Net Operating Income			325000
	Less : Opportunity cost of losing income if Tinted Glass Product Line is discontinued			200000
Requirement	Thus operating Income will increase by			125000