Question

3.   Operating results for the Westmeyer Writing Company were disappointing last year as shown below:

                                                    Pens               Pencils            Erasers            Total   

      Sales                                  $150,000         $100,000         $ 50,000         $300,000

      Variable costs                      (90,000)           (50,000)           (35,000)        (175,000)       

      Fixed costs:

            Discretionary                  (20,000)           (15,000)            (5,000)            (40,000)

            Committed                     (15,000)           (15,000)        (15,000)            (45,000)

      Net income                        $ 25,000         $ 20,000         $ (5,000)         $ 40,000        

      In order to improve profits for next year, the president may drop the Eraser Division. What would be the impact on the profits for the next year if Erasers are discontinued?

      What are some qualitative factors to consider if the Erasers Division is discontinued?

Answer 1

let us calculate net income if Eraser Division is dropped:

	pens	pencils	total
sales	$150,000	100,000	250,000
variable costs	(90,000)	(50,000)	(140,000)
fixed costs:
discretionary	(20,000)	(15,000)	(35,000)
committed	(15,000)	(15,000)	(45,000) (see note)
net income	25,000	20,000	30,000

note: committed fixed costs cannot be avoided even if erasers is discontinued.

Since the Net income reduced to $30,000, it can be said that the profits reduce by ($40,000-30,000)=>$10,000 if erasers discontinued.

Qualitative factors to be considered.

1.Since pencils,pens and erasers are related products, one has the consider the impact of discontinuance on brand presence.

2. Customers might be interested in making tied purchases, that is pencils, pens and erasers of same brand, so the impact of discontinuance on demand of pens and pencils is to be considered.