Question

Maxwell Company's garden chair product line has not reported a profit for several years. It generated a contribution margin of R17 000 last quarter, but reported a loss after fixed operating expenses, which are shown as follows:

Salary of the product line manager	R8 000
Advertising expense for the product	R6 500
Corporate Headquarter utility costs	R 2000
Depreciation cost of corporate headquarter	R3 000
Safety Insurance Cost of the product	R500
Corporate general administrative costs	R8 000

The company estimates that the future performance of the product line will not be materially different from the last quarter.

Required:

Answer the following question and provide explanations and calculations for your answer.

Should the company drop the product line on financial grounds?

Answer 1

Given that:

Maxell Company’s garden chair product line has not reported a profit for several years.