Question

3. Following table shows sales and cost information for the preceding month for the Discount Drug Company and its three major product lines – drugs, cosmetics, and housewares. Among the fixed expenses, Utilities, Depreciation, Rent, and General Administrative expenses are overhead costs that are allocated across the segments and would continue even if the company drops a segment. Using cost-benefit analysis, show whether the company should continue or discontinue the “Houseware” segment. (10 points)

		Product Line
	Total	Drugs	Cosmetics	Houseware
Sales	$250,000	$125,000	$75,000	$50,000
Variable expenses	$105,000	$50,000	$25,000	$30,000
Contribution margin	$145,000	$75,000	$50,000	$20,000
Fixed expenses:
Salaries	$54,000	$29,500	$12,500	$12,000
Advertising	$16,000	$1,000	$7,500	$7,500
Utilities	$2,000	$500	$500	$1,000
Depreciation	$5,000	$1,000	$2,000	$2,000
Rent	$20,000	$10,000	$6,000	$4,000
Insurance	$3,700	$2,000	$500	$1,200
General   Administrative	$30,000	$15,000	$9,000	$6,000
Total fixed expenses	$130,700	$59,000	$38,000	$33,700
Net operating income	$14,300	$16,000	$12,000	($13,700)

Answer 1

Incremental Analysis
	With Houseware	Without Houseware	Incremental Income(loss)
Sales	$250,000	$200,000	($50,000)
Variable expenses	$105,000	$75,000	($30,000)
Contribution margin	$145,000	$125,000	($20,000)
Fixed expenses:
Salaries	$54,000	$42,000	$12,000
Advertising	$16,000	$8,500	$7,500
Utilities	$2,000	$2,000	$0
Depreciation	$5,000	$5,000	$0
Rent	$20,000	$20,000	$0
Insurance	$3,700	$2,500	$1,200
General   Administrative	$30,000	$30,000	$0
Total fixed expenses	$130,700	$110,000	$20,700
Net operating income	$14,300	$15,000	$700
The company should discontinue the “Houseware” segment as the net operating income will Increase.