Adm2341 manufactures and sells four different products. The following data are extracted from the most recent financial statements:
|
|
Products
|
|
|
A
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B
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C
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D
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Sales
Cost of goods sold
Direct materials
Direct labour
Manufacturing overhead
S&A expenses
Operating income
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$2,500,000
300,000
500,000
600,000
300,000
800,000
|
$2,000,000
400,000
600,000
800,000
300,000
(100,000)
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$1,500,000
200,000
400,000
900,000
150,000
(150,000)
|
$ 4,000,000
900,000
1,600,000
300,000
500,000
700,000
|
For each product, 50% of manufacturing overhead is variable costs and variable S&A expenses are equal to 10% of sales. The remaining portion includes traceable and common fixed costs.
The company is considering disposing of the Product C since it has been consistently unprofitable for a number of years. Admw2341's Management team approached you for help and advice on this matter.
REQUIRED1) Prepare an income statement showing the appropriate performance of each product.
2) Adm2341's Top management asked you to provide them with a "decision rule" they could apply regarding Product C. Identify any additional information needed to implement your "decision rule".
3) To rationalise your decision on Product C, you have collected the following data:
a) If product C is eliminated, Product D annual sales will increase by $10%. The Variable cost structure and S&A fixed expenses will be unchanged.
b) If Product C is eliminated, Product A annual sales will drop by 10 %. The Variable cost structure and S&A fixed expenses will be unchanged.
c) If Product C is dropped, the management of the company feels it can save annually a total of $200,000 of fixed manufacturing overhead and S&A expenses.
Do you recommend to Adm2341's Management to drop Product C? Why ?