Problem
Tarmac Co., Inc., has prepared the following product-line income data:
|
|
Product
|
|
Total
|
A
|
B
|
C
|
|
Sales
|
$ 100,000
|
$ 50,000
|
$ 20,000
|
$ 30,000
|
|
Variable expenses
|
60,000
|
30,000
|
10,000
|
20,000
|
|
Contribution Margin
|
40,000
|
20,000
|
10,000
|
10,000
|
|
Fixed Expenses:
|
|
|
|
|
|
Rent
|
5,000
|
2,500
|
1,000
|
1,500
|
|
Depreciaiton
|
6,000
|
3,000
|
1,200
|
1,800
|
|
Utilities
|
4,000
|
2,000
|
500
|
1,500
|
|
Supervisor salaries
|
5,000
|
1,500
|
500
|
3,000
|
|
Maintenance
|
3,000
|
1,500
|
600
|
900
|
|
Administrative expenses
|
10,000
|
3,000
|
2,000
|
5,000
|
|
Total Fixed expenses
|
33,000
|
13,500
|
5,800
|
13,700
|
|
Net Operating Income
|
$ 7,000
|
$ 6,500
|
$ 4,200
|
$ (3,700)
|
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 $800.
* All supervisors' salaries are avoidable.
* If Product C is discontinued, the maintenance department will be able to reduce monthly expenses from $3,000 to $2,000.
* Elimination of Product C will make it possible to cut two persons from the administrative staff; their combined salaries total $3,000.
Required:
Prepare an analysis showing whether Product C should be eliminated.
Product C Relevent Cost
Variable Expense 20000
Factory Rent 1500
Utility 700(1500-800)
Maintenance 1000(3000-2000)
Admin 3000
Total 26200
Sales 30000
Total Savings =3800(3000-26200) As the relevant cost of product C is less than earning, the company should not eliminate product C.