Problem
Mr. Earl Pearl, accountant for Margie Knall Co., Inc., has prepared the following product-line income data:
|
|
|
Product
|
|
|
Total
|
A
|
B
|
C
|
|
Sales
|
93,000
|
43,000
|
24,000
|
26,000
|
|
Variable expenses
|
56,000
|
27,000
|
10,000
|
19,000
|
|
Contribution margin
|
37,000
|
16,000
|
14,000
|
7,000
|
|
Fixed expenses:
|
|
|
|
|
|
Rent
|
3,800
|
1,300
|
1,000
|
1,500
|
|
Depreciation
|
4,800
|
1,800
|
1,200
|
1,800
|
|
Utilities
|
3,440
|
1,200
|
740
|
1,500
|
|
Supervisors' salaries
|
4,840
|
1,100
|
740
|
3,000
|
|
Maintenance
|
2,780
|
1,100
|
840
|
840
|
|
Administrative expenses
|
8,800
|
1,800
|
2,000
|
5,000
|
|
Total fixed expenses
|
28,460
|
8,300
|
6,520
|
13,640
|
|
Net operating income
|
8,540
|
7,700
|
7,480
|
(6,640)
|
The following additional information is available:
The factory rent of $1,500 assigned to Product C is avoidable if the product were dropped.
The company's total depreciation would not be affected by dropping C.
Eliminating Product C will reduce the monthly utility bill from $1,500 to $1,000.
All supervisors' salaries are avoidable.
If Product C is discontinued, the maintenance department will be able to reduce monthly expenses from $2,780 to $2,200.
Elimination of Product C will make it possible to cut two persons from the administrative staff; their combined salaries total $1,000.
Required:
1. Calculate the advantage or disadvantage in dropping Product C. (Input the amount as a positive value. Omit the "tiny_mce_markerquot; sign in your response.)
2. Should the product be dropped?