The Overall Manufacturing Company has been experiencing losses and believes that the round heat exchanger division is the problem. They hope that discontinuing it will improve their overall results. The special equipment dedicated to round heat exchangers has no other use and no salvage value. Discontinuing the line will discharge the two line supervisors. The idle capacity from the discontinued line cannot be used for another product at this time. What do you recommend? Discontinue or not? Create a report that helps to assess the long term profits of each line.
Overall Manufacturing Company
Total Round Rectangular Octagonal
Sales $1,000,000 $140,000 $500,000 $360,000
Variable costs $410,000 $60,000 $200,000 $150,000
Contribution margin $590,000 $80,000 $300,000 $210,000
Advertising $216,000 $41,000 $110,000 $65,000
Depreciation $95,000 $20,000 $40,000 $35,000
Line supervisors' salaries $19,000 $6,000 $7,000 $6,000
General factory overhead* $200,000 $28,000 $100,000 $72,000
Total fixed costs $530,000 $95,000 $257,000 $178,000
Operating income (loss) $60,000 $(15,000) $43,000 $32,000
*Allocated fixed cost is spread based on a percent of sales
See your tutorial in Excel, attached.
Should the production and sale of the round heat exchanger be discontinued? Show your analysis to support your answer.
No. The Round product line contributes $13,000 towards the common costs and if you discontinue, ...
Your tutorial creates a new analysis that highlights product margin and explains the best strategy.