Question

Which product should be recommended to be discontinued, 1,2,3 or 4?

As the accounting expert for a local firm of management consultants, you have been left with three scenarios to resolve for different clients. Scenario 2: Bromwich Ltd produces four products. The budgeted results suggest the following for next year Product Sales 80,000 76,000 35,000 19,000 Variable costs 62,000 28,000 37,500 11,000 Fixed costs 21,000 18,000 8,000 2,000 Profit/(Loss) (3,000) 30,000 (10,500) 6,000 The Managing Director is wondering whether or not to discontinue some of the product range. Which should be recommended to be discontinued?

Answer 1

Analysis of Present Profits Products Total Particulars 1 2 3 Sales 80,000 76,000 35,000 19,000 2,10,000 Less: Variable Costs 62,000 28,000 37,500 11,000 1,38,500 Contribution (2,500) 18,000 48,000 8,000 71,500 Less: Fixed Costs 2,000 21,000 18,000 8,000 49,000 Profit Loss (3,000) 30,000 (10,500) 6,000 22,500 Product 3 should be discontinued as it has a negative contribution Product 1 is having a Positive contribution , hence should not be discontinued Statement showing profits after discontinuation of Product 3 Products Particulars Total 1 2 4 Sales 80,000 76,000 19,000 1,75,000 Variable Costs 28,000 62,000 11,000 1,01,000 Contribution 18,000 48,000 8,000 74,000 Fixed Costs 49,000 Profit/ Loss 25,000 The total Profits of the Bromwich rises with $(25000 22500) $250o If Product 1 is discontinued the profits will decrease by $(25000 -18000) =$7000 Hence, Product 1 will continue and only Product 3 will discontinue

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