Question

The income statement information for Ivanhoe 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 95 kg 95 kg 95 kg 285 kg $ 2,090 $1,520 $1,710 $5,320 1,330 950 1,026 3,306 760 570 684 2,014 608 689 494 1,791 86 76 100 262 694 765 594 2,053 $ 66 $ (195) $ 90 $ (39) 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 ka

Answer 1

Solution:

1)

Corporation should emphasis Royal product as it provides highest income.

2)

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

	Premium	Royal	Total
Contribution margin	$760	$684	$1,444
Less: Product line fixed cost	$608	$494	($1,102)
Less: Corporate costs			($262)
Net income			$80

3)

Break even point for regular = product line fixed cost for regular/ CM per kg

=$689 / (570/95)

=$689/6

=115 kg

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