Question

The income statement information for Vaughn follows: Sales units Sales Variable costs Contribution margin Production line fixed costs* Corporate costs (allocated)** Total fixed costs Operating income (loss) Premium Regular Royal Total 60 kg 60 kg 60 kg 180 kg $ 1,320 $ 960 $1,080 $3,360 840 600 648 2,088 480 360 432 1,272 384 435 12 1,131 63 165 438 483 1,296 42 $ (123) 57 $ (24) 54 75 * 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)

Answer 1

Solution 1:

Corporation should emphasis Royal product as it provides highest income.

Solution 2:

Yes, regular product should be dropped as its contribution margin is lesser than avoidable fixed costs.

Operating income if regular product is dropped = Existing net income - Loss of contribution margin + Avoidable fixed costs of regular product

= -$24 - $360 + $435 = $51

Solution 3:

Break even point for regular = Product line fixed cost for regular / CM per Kg = $435 / (360/60) = 73 Kg