The Discount Drug Company has three major product lines: drugs, cosmetics, and housewares. The company provides the following sales and cost information for the month of May for the store in total and for each separate product line (000 omitted):
|
Drugs
|
Cosmetics
|
Housewares
|
Total
|
|
Sales
|
$240
|
$300
|
$360
|
$900
|
|
Less: Variable expenses
|
160
|
180
|
200
|
540
|
|
CM
|
$80
|
$120
|
$160
|
$360
|
|
Less: Fixed costs
|
|
|
|
|
|
Salaries
|
$34
|
$40
|
$46
|
$120
|
|
Advertising
|
30
|
50
|
40
|
120
|
|
Other fixed costs
|
40
|
20
|
40
|
100
|
|
Total
|
$104
|
$110
|
$126
|
$340
|
|
Net income
|
$(24)
|
$10
|
$34
|
$20
|
The salaries represent wages paid to employees engaged directly in each product line area.
The advertising represents direct advertising of each product line, and is avoidable if the line is dropped. Other fixed costs, which are all committed costs, will continue and will split equally between cosmetics and housewares.
1. Prepare a combined income statement for cosmetics and housewares on the assumption that drugs are discontinued with no effects on sales of the other product lines.
2. On the basis of the analysis in question 1,would you advise dropping the drugs line?