Question

Knowledge Check 01 Which of the following factors should be considered when deciding whether to keep a product line or drop it? (Select all that apply) Check All That Apply 0 Opportunity costs of using the production facility currently being used for the product line 0 Revenues generated by the product line 0 Variable costs incurred in manufacturing the product 0 Direct fixed costs associated with the product line 0 Common fixed costs allocated to the product line

Answer 1

1. Factors That Should Be Considered when Deciding to keep a product line or drop it.

1. Opportunity cost of using the production facility Currently being used for product line
2. Revenues generated by product line
3. Variable Costs incurred in manufacturing the product
4. Direct Fixed costs associated with the product line
5. Common Fixed Costs associated to the Product Line
6. Research and Development Costs Spent on designing the product line

== All the Above Factors a,b,,c, and d should be considered while deciding to keep a product line or drop it.

== Points e and f should not be considered while deciding to keep a product line or drop it.

The Major concept of decidable factor depend upon whether the costs are relevant or irrelevant

1. Opportunity Cost : Opportunity Cost Is defined as the value forgone due to decision of keeping a product and dropping another, Hence the benefit foregone due to dropping of a product is relevant in decision making, Hence opportunity cost is relevant cost in decision making
2. Revenues Generated : The Revenues generated by both the products and Costs involved in making Those Products should be decided to know whether the selection of one product over the other is generating any incremental revenues or not
3. Variable Cost : The Revenues generated by both the products and Costs involved in making Those Products should be decided to know whether the selection of one product over the other is generating any incremental revenues or not
4. Direct Fixed Costs: Since these are directly associated with Product line these costs are foregone by change od decision in favor of one product over the another, Hence direct fixed costs are RELEVANT costs

5. Common Fixed costs apportioned – these costs are just apportioned and are fixed irrespective of the product selected, they are just being apportioned
6. Research and development Costs: SUNK costs/ Dead Cost , they are already incurred before decision is being made and cant be evaded by selecting a product and dropping another, hence these are irrelevant costs.

2. A sell or process further decision involves deciding whether to

1. Accept a special order for a price lower than normal
2. Continue a product line or eliminate it
3. Sell a product as is continue to refine it
4. Produce a product in-house or outsource it

Answer : C

Explanation:

1. Accept a special order for a price lower than normal: It is about accepting special order for normal price considered for making use of unused capacities to produce more and sell it at less cost (The Same should depend on recovery of fixed costs or incremental contribution being received from accepting special order)

2. Continue a product line or eliminate it : The same is regarding either to manufacture or to eliminate it completely, there is no objective of processing it further

3. Sell a product as is continue to refine it: Here there is objective before management to making decision about selling it as-it-is or processing it further

4. Produce a product in-house or outsource it : The Same is Regarding making decision about making then product on own or outsourcing the making activity by comparing the costs involved, here also there is no element of processing it further

SOLUTION to Q.No:3
projected annual Demand : 8000 units
Activity	Ordinary backpacks	Hiking backpacks
Estimated Sales Price	50	75
Estimated Manufacturing Cost per Unit
Direcr Materials	15	20
Direcct Labour	10	15
Variable manufacturing Overhead	5	10
Fixed manufacturing Overhead	5	5
unit manufacturing Cost
Additional Development Cost
Profitability analysis	Ordinary backpacks	Ordinary backpacks	Hiking backpacks	Ordinary backpacks
Sales Units	8000		8000
Estimated Sales                                                               A	50	$ 4,00,000.00	75	$ 6,00,000.00
Variable Costs:
Direcr Materials	15	$ 1,20,000.00	20	$ 1,60,000.00
Direcct Labour	10	$    80,000.00	15	$ 1,20,000.00
Variable manufacturing Overhead	5	$    40,000.00	10	$    80,000.00
B		$ 2,40,000.00		$ 3,60,000.00
CONTRIBUTION                                                 C = A-B		$ 1,60,000.00		$ 2,40,000.00
Fixed Costs	5	$    40,000.00	5	$    40,000.00
Additional Development Costs		$                 -		$      8,000.00
TROTAL FIXED COSTS                                                D		$    40,000.00		$    48,000.00
Profit or (Loss)                                         E= C-D		$ 1,20,000.00		$ 1,92,000.00
indremental Profit or loss			$ 72,000.00
Hence Answer is $72,000 - option 1