Question

Exercise 4.33 The income statement information for Monty follows: Premium Regular Royal Total Sales units 60 kg 60 kg 60 kg 180 kg Sales $ 1,320 $ 960 $ 1,080 $ 3,360 Variable costs 840 600 648 2,088 Contribution margin 480 360 432 1,272 Production line fixed costs* 384 435 312 1,131 Corporate costs (allocated)** 54 48 63 165 Total fixed costs 438 483 375 1,296 Operating income (loss) $ 42 $ (123 ) $ 57 $ (24 ) * 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 Regular, then Premium, then RoyalRegular, then Royal, then PremiumRoyal, then Premium, then RegularPremium, then Royal, then RegularPremium, then Regular, then RoyalRoyal, then Regular, then Premium 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 should notshould be dropped. Operating income/(loss) $

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 0 decimal places, e.g. 125.) Breakeven point kg

Answer 1

Should emphasise in the order of income generated by each product

i.e. Royal then Premium then Regular

Should drop

Operating income will increase by Avoidable fixed costs – Contribution margin

= 435-360

= $75

New operating income = $51

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

= 435/6

= 72.5 kgs

i.e. 73 kgs approx.