Task: Relevant Costs: dropping a product
Merchant Company manufactures and sells three models of electronic printers. Ken Gail, president of the company, is considering dropping model JT484 from its product line because the company has experienced losses for this product over the past three quarters. The following product-level operating data have been complied for the most recent quarter:
|
CATEGORY
|
TOTAL
|
JT284
|
JT384
|
JT484
|
|
Sales
|
$1,000,000
|
$500,000
|
$200,000
|
$300,000
|
|
Variable Costs
|
600,000
|
300,000
|
100,000
|
200,000
|
|
Contribution Margin
|
400,000
|
200,000
|
100,000
|
100,000
|
|
Fixed Costs:
|
|
|
|
|
|
Rent
|
50,000
|
25,000
|
10,000
|
15,000
|
|
Depreciation
|
60,000
|
30,000
|
12,000
|
18,000
|
|
Utilities
|
40,000
|
20,000
|
5,000
|
15,000
|
|
Supervision
|
50,000
|
15,000
|
5,000
|
30,000
|
|
Maintenance
|
30,000
|
15,000
|
6,000
|
9,000
|
|
Administrative
|
100,000
|
30,000
|
20,000
|
50,000
|
|
Total Fixed Costs
|
330,000
|
135,000
|
58,000
|
137,000
|
|
Operating income (loss)
|
70,000
|
65,000
|
42,000
|
(37,000)
|
In addition, the following information is also available:
• Factory rent and depreciation will not be affected by a decision to drop model JT484.
• Quarterly utility bills will be reduced from $40,000 to $31,000 if JT484 is dropped.
• Supervision costs for JT484 can be eliminated if dropped.
• The maintenance department will be able to reduce quarterly costs by $7,000 if JT484 is dropped.
• Elimination of JT484 will make it possible to eliminate two administrative staff positions with combined salaries of $30,000 per quarter.
A. Should Merchant Company eliminate JT484?
B. Merchant’s sales manager believes that it is important to continue to produce JT484 to maintain a full product line. He expects the elimination of JT484 will reduce sales of the remaining two products by 5% each. Will this information change your answer to (a)? Explain.