Question

Adm2341 Co. manufactures and sells two products (A and B). Projected data for next year are: Product A Product B Sales in units 15,000 10,000 Sale price per unit $100 $160 Variable costs manufacturing 50% of sales 60% of sales Sales commissions 20% of sales 20 % of sales Advertising $100,000 $120,000 Other fixed costs (note 1) $240,000 $240,000 Note 1: Each amount of "Other fixed costs" includes $100,000 fixed general overhead allocated by the Headquarter of Adm2341 Co. to each product. The remaining costs are traceable fixed costs to each product. Adm2341 Co. anticipates no change in the operating result for Product B in the foreseeable future if the product is manufactured. However, Adm2341 Co. is re-examining all of its products and is trying to decide whether or not to discontinue Product B. REQUIRED: 1. Prepare an income statement in Contribution margin format showing the segment margin for each product and operating income for Adm2341 Co. as a whole. 2. Assume that discontinuing the production and sale of Product B will not affect the sale of Product A. If the company drops Product B, what will be the change in annual operating income due to this decision? Would you recommend dropping or not product B? Why? 3. Assume that discontinuing Product B result in an increase of $200,000 in sales of Product A. There will be no increase in advertising expenses. The variable cost structure stays unchanged. If Adm2341 Co. drops Product B, what will be the impact in operating income next year due to this decision? Would you recommend dropping or not product B? Why? 4. Top management of Adm2341 Co. decided not to drop Product B. Assume that the maximum production capacity of Adm2341 Co. is limited to 18,000 Hours and the production of one unit of Product A requires 0.50 hours and one unit of Product B requires 1.25 Hours. The market demand is 15,000 units for Product A and 10,000 units for Product B. a) Is here enough capacity to meet the market demand for each product? b) Compute the contribution margin per hour for each product? c) What is the optimal solution do you suggest for Product A and Product B d) Present the income statement according to your optimal solution.

Answer 1

Income Statement existing Structure Company Particulars Sales in units Total Sales Total variable cost Contribution Margin Traceable fixed cost Segment Margin Common Fixed cost Operating Income А 15,000 1,500,000 1,050,000 450,000 240,000 210,000 в 10,000 1,600,000 1,280,000 320,000 260,000 60,000 25,000 3,100,000 2,330,000 770,000 500,000 270,000 200,000 270,000 210,000 60,000 Income Statement Discontinuing Product B Particulars Sales in units Total Sales Total variable cost Contribution Margin Traceable fixed cost Segment Margin Common Fixed cost Operating Income 15,000 1,500,000 1,050,000 450,000 240,000 210,000 Company 15,000 1,500,000 1,050,000 450,000 240,000 210,000 200,000 210,000 Discontinuing B is not recommended as the company operating income reduced to the extent of $ 60,000 210,000

Income Statement -Increase in Sale of Product A Particulars Sales in units Total Sales Total variable cost Contribution Margin Traceable fixed cost Segment Margin Common Fixed cost Operating Income A Company Discontinuing B as resulted in 17,000 17,000 increase in sale of Product A. But 1,700,000 1,700,000 the Operating Income remains as a 1,190,000 1,190,000 whole remains unchanged. Hence 510,000 510,000 the company may discontinue 240,000 240,000 product B. The discontinuation 270,000 270,000 may depend on other factors such 200,000 as demand, Process invovled etc. 270,000 270,000 Income Statement - Optimal Product Mix Company 100 160 128 30 32 60 25.6 Particulars Sale / Unit VC/Unit Contribution Margin Contribution Margin/Hr Ranking Demand Units Total Sales Total variable cost Contribution Margin Traceable Fixed cost Segment margin Common Fixed cost Operating income Available Hrs 18000 Hrs For Product A 7500 Hrs For Product B 10500 Hrs 15000 1,500,000 1,050,000 450,000 240,000 210,000 8400 1,344,000 1,075,200 268,800 260,000 8,800 23,400 2,844,000 2,125,200 718,800 500,000 218,800 200,000 18,800