Download ProblemsonDropOrContinueProductLineDecision

Problems on Drop or Continue Product Line Decision
P– 1. A business trading on stationery is thinking of dropping the ink section, which is showing
a confines loss for the last few months. Following is its monthly income statements.
Particulars
Sections
Pen
Ink Notecopies
Sales
Rs. 8,000 Rs. 16,000
Rs. 24,000
Variable costs
4,000
12,000
16,000
Contribution margin
4,000
4,000
8,000
Fixed cost :
Separable
1,000
2,000
2,000
Non– separable
2,000
4,000
4,000
Total
3,000
6,000
6,000
Net Income
1,000
(2,000)
2,000
If Ink department is dropped, the vacated space can be rented at Rs.125 per month of which
Rs.25 is maintenance cost. Do you agree for dropping Ink department?
P – 2. The Regal Cycle Company manufactures three types of bicycles – a dirt bike, a 10
speed bike, and a touring bike. Data on sales and expenses for the past six months follow:
Particulars
Total Dirt bikes 10–speed
Touring
bikes
bikes
Sales
$ 300,000 $ 90,000 $ 150,000 $ 60,000
Less: Variable expenses
120,000
27,000
60,000
33,000
Contribution margin
180,000
63,000
90,000
27,000
Less: Fixed expenses:
Advertising, direct
30,000
10,000
14,000
6,000
Depreciation of special equipment
23,000
6,000
9,000
8,000
Salary of line supervisor
35,000
12,000
13,000
10,000
Common, but allocated*
60,000
18,000
30,000
12,000
Total fixed expenses
148,000
46,000
66,000
36,000
Net income (loss)
$ 32,000 $ 17,000
$ 24,000 $ (9,000)
* Allocated on a basis of sales dollars
Management is concerned about the continued losses shown by the touring bikes and wants a
recommendation as to whether or not the line should be discontinued. The special equipment
used to produce touring bikes has no resale value.
Required: Should production and sale of the touring bikes be discontinued? Show
computations to support your answer.
P – 3. You have been engaged to assist the management of the Arcadia Corporation in
arriving at certain decisions. Arcadia has its home office in Ohio and leases factory
buildings in Texas, Montana, and Maine, all of which produce the same product. The
management of Arcadia has provided you with a projection of operations for 19x7, the
forthcoming year, as follows:
Particulars
Total
Texas
Montana
Maine
Sales
$ 4,400,000
$ 2,200,000
$ 1,400,000
$ 800,000
Fixed costs:
Factory
1,100,000
560,000
280,000
260,000
Administration
350,000
210,000
110,000
30,000
Variable costs
1,450,000
665,000
425,000
360,000
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Allocated home office costs
Total
Net profit from operations
500,000
3,400,000
1,000,000
225,000
1,660,000
540,000
175,000
990,000
410,000
100,000
750,000
50,000
The sales price per unit is $25. Due to the marginal results of operations of the factory in
Maine, Arcadia has decided to cease operations and sell that factory’s machinery and
equipment by the end of 19x6. Arcadia expects that the proceeds from the sale of these
assets would be greater than their book value and would cover all termination costs. Arcadia,
however, would like to continue serving its customers in that area if it is economically feasible
and is considering one of the following three alternatives:
a. Expand the operations of the Montana factory by using space presently idle. This move
would result in the following changes in that factory’s operations:
Particulars
Increase Over factory’s current operations
Sales
50%
Fixed costs:
Factory
20%
Administration
10%
Under this proposal variable costs would be $8 per unit sold.
b. Enter into a long–term contract with a competitor who will serve that area’s customers. This
competitor would pay Arcadia a royalty of $4 per unit based upon an estimate of
30,000 units being sold.
c. Close the Maine factory and not expand the operations of the Montana factory.
Note: Total home office costs of $550,000 will remain the same under each situation.
Required:
In order to assist the management of Arcadia Corporation in determining which alternative is
more economically feasible, prepare a schedule computing Arcadia’s estimated net profit
from total operations that would result from each of the following methods:
a. Expansion of the Montana factory.
b. Negotiation of long–term contracts on a royalty basis.
c. Shutdown of Maine operations with no expansion at other locations. (AICPA adapted)
P – 4. The Croteau Food Company has two divisions: the Tea Divisions and the Crumpets
Division. The divisional income statement for the year ended December 31, 19x1,
follows (in thousands):
Particulars
Tea
Crumpets
Total
Sales
$ 5,000
$ 1,000
$ 6,000
Costs:
Direct material
$ 2,000
$ 200
$ 2,200
Direct labour
500
90
590
Variable overhead
400
70
470
Fixed overhead
750
500
1,250
Variable selling and administrative
100
40
140
Fixed selling and administrative
400
200
600
Total costs
$ 4,150
$ 1,100
$ 5,250
Net income
$ 850
($ 100)
$ 750
The two divisions are housed in a single facility; and if management should decide to curtail
or drop one or the other activity, it is doubtful that total capacity would be reduced.
The selling price for tea is $2.50 per case; for crumpets, $1 per case.
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Required:
a. Revise the form of the income statement to make it more meaningful for the purpose of
appraising divisional profitability.
b. Compute break–even points for (1) tea; (2) crumpets; and (3) the total company.
c. Should the company drop crumpets? Why?
d. Comment on other factor which might influence your decision in this case.
P – 5. A discount department has three major departments: Groceries, General Merchandise
and Drugs. The department is thinking of dropping the Groceries departments which has
constantly shown a net loss. The present annual net income of the store is as follows: (in
Thousands)
Particulars
Groceries
General
Drugs
Total
Merchandise
Sales
$. 1,000
$. 800
$. 100
$. 1,900
Variable costs
800
560
60
1,420
Contribution margin
200
240
40
480
Fixed costs:
Separable
150
100
15
265
Joint but allocated
60
100
20
180
Total fixed cost
210
200
35
445
Net income (loss)
(10)
40
5
35
Required:
1. Which alternative would you recommend either to drop or continue the grocery
department? Assume that the total assets invested will not be affected by decision. Also
assume that the vacated space will be idle.
2. Should the groceries department be closed under the condition that the space made
available by the dropping of groceries would be used by an expanded G. Merchandise
Department? The sales will be increase by $ 500, generates a 30% contribution margin
and have separable fixed costs of $ 70 by doing it.
P – 6. The officers of Bradshaw Company are reviewing the profitability of the company’s
four products and the potential effect of several proposals for varying the product mix. An
excerpt from the income statement and other data follow:
Product
Particulars
Total
P
Q
R
S
Sales
$ 62,600
$ 10,000
$ 18,000
$ 12,600
$ 22,000
Cost of goods sold
44,247
4,750
7,056
13,968
18,500
Gross profit
18,326
5,250
10,944
(1,368)
3,500
Operating expenses
12,012
1,990
2,976
2,826
4,220
Income before income taxes
6,314
3,260
7,968
(4,194)
(720)
Units sold
1,000
1,200
1,800
2,000
Sales price per unit
10.00
15.00
7.00
11.00
Per unit Variable cost of goods sold
2.50
3.00
6.50
6.00
Per unit Variable operating
1.17
1.25
1.00
1.20
expenses per unit
Each of the following proposals is to be considered independently of the other proposals.
Consider only the product changes stated in each proposal; the activity of other products
remains stable. (Ignore income taxes)
Required:
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a. If product R is discontinued, what will be the effect on income?
b. If product R is discontinued and a consequent loss of customers causes a decrease of 200
units in sales of Q, what will be the total effect on income?
c. If the sales price of R is increased to $8 with a decrease in the number of units sold to
1,500, what will be the effect on income?
d. The plant in which R is produced can be utilized to produce a new product T. The total
variable costs and expenses per unit of T are $8.05, and 1,600 units can be sold at $9.50
each. If T is introduced and R is discontinued, what will be the total effect on income?
e. Part of the plant in which P is produced can easily be adapted to the production of S, but
changes in quantities may make changes in sales price advisable. If production of P is
reduced to 500 units (to be sold at $12 each) and production of S is increased to 2,500
units (to be sold at $10.50 each), what will be the total effect on income?
f. Production of P can be doubled by adding a second shift, but higher wages must be paid,
increasing variable cost of goods sold to $3.50 for each of the additional units. If the
1,000 additional units of P can be sold at $10 each, what will be the total effect on
income?
P–7
PRINGLES DEPARTMENTAL STORE
Income Statement
Under Variable Costing
For the quarter ending march 19x5
A
B
C
$ 280,000
$ 700,000
$ 520,000
156,000
435600
312,000
124,000
264,400
208,000
Particulars
Sales
Less: Variable expense
Contribution margin
Less: Fixed expenses:
Direct advertising
General advertising
Salaries
Rent on building
Utilities
Employment taxes
Depreciation on fixtures
Insurance on inventory and fixtures
General office expenses
Service department expenses
Total fixed cost
Net income (Loss)
26,000
5,600
36,000
19,000
8,000
5,400
10,800
1,200
20,000
15,000
147,000
(23,000)
40,000
14,000
58,000
31,500
13,600
8,700
16,300
1,400
20,000
15,000
218,500
45,900
31,500
10,400
42,000
26,000
9,300
6,300
12,900
1,100
20,000
15,000
174,500
33,500
Total
$ 1,500,000
903600
596,400
97,500
30,000
136,000
76,500
30,900
20,400
40,000
3,700
60,000
45,000
540,000
56,400
Note: General expenses, rent on building and employment taxes are allocated based on
sales dollars, space occupied and salaries paid directly in each department.
You has been assigned task of making a recommendation to the president as to whether or
not department-A should be eliminated. You have gathered the following information.
a. All departments are housed in the same building. The store leases the entire building at a
fixed annual rental rate.
b. One of the employees in department A is Mary Collins, who has been with the company
for many years. If department A is eliminated she will be transferred to another
departments. Her salary is $4,000 per quarter.
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c. If department A is eliminated, the fixtures in the department will be transferred to another
departments.
d. If department A is eliminated, the utilities will be reduced by about $7,000 per quarter.
e. One fourth of the insurance in department A relates to the fixtures in the department, the
remainder relates to the department’s merchandise inventory.
f. The company has two service departments– purchasing and warehouse. If department A is
eliminated, the company can discharge one fulltime and one part time person from these
departments. The combined salaries and other employment costs of these employees is $
5,300 per quarter. General office expenses will not change.
Required:
1. Assume that the company has no alternative use for the space now being occupied by the
department. Give your advice whether or not to department should be dropped?
2. Assume that the space being occupied by department A is valuable and could be sub
leased at a rental rate of Rs. 60,000 per quarter. Would you advice the company to
eliminate department A and sublease the space? Show computation.
P – 8. The management of a company is considering the proposal to discontinue the
manufacturing of product X from out of the list of its product X, Y and Z the details of which
given below:
X
Y
Z
Capacity in actual production
20%
40%
40%
Units manufactured
4,000
10,000
12,000
Cost per unit:
Material
Rs. 25
Rs 20
Rs 40
Labour
15
10
20
Fixed overhead
4
4
5
Variable overhead
4
3
5
48
37
70
Profit (Loss) per unit
(4)
13
10
Selling price per unit
44
50
80
It is intended to utilize the disengaged capacity of X in Y and Z equally.
Expected rise in price and costs are as follows:
Particulars
Y
Z
Material
5%
5%
Labour
10%
10%
Selling
10%
5%
You are required to prepare a statement of projected profitability with suggestion for
adopting the scheme.
P –9. The Bottlers Nepal Ltd. a producer of soft drink, produces three standard products
called Coke, Fanta and Soda. The results of the operation for the last year ending on 30th
Chaitra are presented below in an income statement.
Particulars
Coke
Fanta
Soda
Total
Number of bottles sold
10,000
10,000
5,000
25,000
Sales Revenue (Rs.)
2,00,000
2,00,000
1,00,000
5,00,000
Less: Cost of production:
Direct Material
40,000
40,000
20,000
1,00,000
Direct Labour
40,000
40,000
20,000
1,00,000
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Manufacturing overheads:
Variable overhead
Fixed overhead
Total cost of production
Gross Margin available
Less: Other costs:
Variable selling & Adm. cost
Fixed selling & Adm. cost
Total
Net income before tax
20,000
40,000
1,40,000
60,000
20,000
40,000
1,40,000
60,000
10,000
30,000
80,000
20,000
50,000
1,10,000
3,60,000
1,40,000
10,000
20,000
30,000
30,000
10,000
20,000
30,000
30,000
5,000
20,000
25,000
(5,000)
25,000
60,000
85,000
55,000
The result of operation shows product Soda has suffered losses for years. Therefore, the
management is considering to drop out Soda from its production schedule. If it does so it will
be able to avoid all variable costs associated with the product Soda and will be able to
reduce its fixed manufacturing overhead cost by Rs. 10,000 as depreciation cost of
specialized machine. All other fixed costs are allocated fixed cost will remain there
irrespective of decision, but the company will lose its sales of other products by 5%.
Required: Should the company drop out Soda?
(TU 2052)
P – 10. The income statement of a multi-product company has been given below:
Particulars
A
B
C
Total
Capacity utilization
40%
30%
30%
100%
Units produced & sold
5,000
4,000
4,000
13,000
Sales revenue
Rs. 400,000
Rs. 240,000
Rs. 200,000
Rs. 840,000
Less variable cost
200,000
80,000
160,000
440,000
Contribution margin
200,000
160,000
40,000
400,000
Less fixed cost:
Joint fixed cost
80,000
60,000
60,000
200,000
Department fixed cost
40,000
30,000
30,000
100,000
Total fixed cost
120,000
90,000
90,000
300,000
Net income/B.T.
80,000
70,000
(50,000)
100,000
Seeing the state of product C the company has been considering to drop the product and
take the following alternatives:
i) To drop product C and keep capacity un-utilized and avoid departmental fixed cost by
cent percent.
ii) To transfer the available capacity to produce product A, and the result will be increased
in production of A by 2,000 units and increase in department fixed cost by Rs. 40,000.
iii) To transfer the available capacity of C product to produce product B. The result will be
increased in production volume by 100%, and an increase of variable cost for additional
product by Rs.10 per unit over and above the regular V cost and increase in departmental
fixed cost by Rs.20,000.
Required:
a. Should the company drop product C if alternative II & III are not available.
b. Which of the other two alternatives the company should choose and why? (TU 2054)
P –111 Electronic Co. Ltd manufactures Tube, Television and Refrigerator in three different
autonomous departments. The income statement regarding such products are given below.
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Income Statement of Electronic Co. Ltd
For the year ending 2005
Particulars
Tube
Television
Refrigerator
Total
Sales units
10,000
1,500
2,000
13,500
Sales Revenue
200,000
450,000
800,000 1450,00
Less: Variable Cost
100,000
200,000
500,000 800,000
Gross Profit
100,000
250,000
300,000 650,000
Less: Departmental
20,000
100,000
200,000 320,000
fixed cost
Joint fixed cost
30,000
50,000
120,000 200,000
Net Income
50,000
100,000
(20,000) 130,000
The refrigerator division bas suffered losses for years. The management is considering to
drop out Refrigerator from its production schedule. If it is dropped, the capacity of the
company cannot be changed.
Required
1. Should the refrigerator division be dropped? Give you decision with necessary
calculations.
2. The output of the tube division is the input of the television division. What price should the
tube division charge for its product to the television division if (i) the tube division has
excess capacity (ii) It has no excess capacity.
P –121Buddha Enterprises runs two retail shops: Book Stall and Stationery. Monthly income
data of Buddha Enterprises are presented in the following table for December 2006.
Book Stall
Sales
Less: Variable Expenses
Contribution Margin
Less: Fixed Cost
Operating Income (Loss)
Stationary
Total
Rs. 240,000
96,000
Rs.360,000
252,000
Rs.600,000
348,000
144,000
60,000
108,000
120,000
252,000
180,000
84,000
(12,000)
72,000
Additional information:
Buddha estimates that closing the stationery would result in a 10 % decrease in Book store
sales, while closing the Book store would not affect stationery store’s sales.
One- fourth of each store’s fixed expenses would continue through January 1, 2007, if either
stores were closed. The operating results for December 2006 are representative of all
months.
Required:
a. Calculate Buddha’s breakeven sales volume as on Dec.2006.
b. Calculate the increase or decrease in Buddha’s monthly operating income during 2007, if
the stationery store is closed.
c. Buddha is considering a promotional campaign at the stationery store that would not
affect the Book stall. Monthly promotion expenses at the stationery store that would be
increased by Rs. 15000 in order to increase its sales by 10 %. What would be the effect
of this promotional program on the Buddha’s monthly operating income during 2007? [PU
2007]
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