Question

The income statement information for Skysong follows: Premium Regular Royal Total Sales units 150 kg 150 kg 150 kg 450 kg Sales $ 3,300 $2,400 $2,700 $8,400 Variable costs 2,100 1,500 1,620 5,220 Contribution margin 1,200 900 1,080 3,180 Production line fixed costs* 960 1,088 780 2,828 Corporate costs (allocated)** 135 120 158 413 Total fixed costs 1,095 1,208 938 3,241 Operating income (loss) $ 105 $ (308) $ 142 $ (61) * If the company drops the product, these costs are no longer incurred. ** None of these corporate costs are expected to change if a product line is dropped. Using the general decision rule, which product should the corporation emphasize? Emphasis order LINK TO TEXT LINK TO TEXT LINK TO TEXT Using the general decision rule, should the corporation drop Regular (assuming no changes in demand for other products)? Show how operating income would change if Regular were dropped. (Show a loss preceded by a minus sign, e.g. -200 or (200).) Regular be dropped. Operating income/(loss) LINK TO TEXT LINK TO TEXT LINK TO TEXT At what point (in kg) would the managers be indifferent to dropping Regular? In other words, what is the breakeven point for Regular? (Round answer to o decimal places, e.g. 125.) Breakeven point

Answer 1

Corporation should emphasize on Royal, as it is the most profitable product

Yes, should be dropped

Increase in income = Savings in fixed costs – contribution margin lost

= 1,088-900

= $188

i.e. Revised operating income = -61+188 = $127

Break even point = Traceable fixed costs/Contribution margin per kg

= 1088/6

= 181.33 kgs

i.e. 181 kgs