(Product line) Gilfeather Food Service sells high-quality ice cream and steaks via overnight delivery. Income statements showing revenues and costs of fiscal year 2010 for each product line are as follows.
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Ice Cream
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Steaks
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Sales
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$4,000,000
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$2,000,000
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|
Less: Cost of merchandise sold
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(2,600,000)
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(1,500,000)
|
|
Commissions to salespeople
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(200,000)
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(150,000)
|
|
Delivery costs
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(600,000)
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(120,000)
|
|
Depreciation on equipment
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(200,000)
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(100,000)
|
|
Salaries of division managers
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(80,000)
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(75,000)
|
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Allocated corporate costs
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(100,000)
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(100,000)
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|
Net income (loss)
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$ 220,000
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$ (45,000)
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Management is concerned about profitability of steaks and is considering dropping the line and estimates that the equipment currently used to process steaks could be rented to a competitor for $8,500 annually. If the steaks line is dropped, allocated corporate costs would decrease from a total of $200,000 to $170,000, and all employees, including the manager of the product line, would be dismissed. The depreciation would be unaffected by the decision, but $105,000 of the delivery costs charged to the steaks line could be eliminated if it is dropped.
a. Recast the preceding income statements in a format that provides more information in making this decision regarding the steaks product line.
b. What is the net advantage or disadvantage (change in total company pre-tax profits) of continuing sales of steaks?
c. Should the company be concerned about losing sales of ice cream products if it drops the steaks line? Explain.
d. How would layoffs that would occur as a consequence of dropping the steaks line adversely affect the whole company?