Keep or drop a product line
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Randazzo may produce 80,000 components per year for various vehicles and 5,000 per year for the corvette. Selling prices vary greatly across the product line as a result of market supply and demand. The machine shop is automated. By changing cutting tools and entering different measurements into the system a variety or products can be manufactured. Many production costs are variable and can be traced to individual products. The cost accountant recently completed a study that associated cost and revunue data with each product listed in the company's catalog. The accountant estimated $600,000 of fixed costs would be associated with the production of these ten products.
Exhibit A
Product A B C D E F G H I J
(SALES IN 50 80 10 20 70 25 5 12 11 15
VOLUME IN
UNITS X 1000)
(SELLING PRICE $12 $15 $2 $10 $15 $10 $2 $5 $5 $8
PER UNIT)
VARIABLE COST $10 $11 $3 $8 $10 $8 $4 $4 $5 $6
The results of the study were: two of the ten products in the sample had variable costs exceeding their selling price. The vice-president defended the current strategy of manufacturing a full product line. Many of the customers control the costs by reducing the number of vendors from which they purchased merchandise. She argued that if Randozzo no longer produced the product for corvett brake components then retail chains would likely turn to their competitors for other products as well. Randazzo knew that dropping products form the lien would necessitate lay-offs of some salaried and hourly employees. in the short run, lost production volume could not be made up by increases in production of other products. Over the years he had worked hard to achieve a culture of trust and cooperation within the company and community. He wondered about the options available to him
A. What financial and nonfinancial consideration are relevant to the management team's decision to keep or drop a product line?
B. Assume $70,000 of the $600,00 in fixed costs can be save if products C and G are dropped. What is the total benefit to the company of dropping the two products?
C. Do you agree with the marketing vice president's concern about carrying a full product line?
D. As a consultant to Randazzo, what would you recommend to:
1. ensure each product in the line is profitable, or
2. ensure the entire line is profitable?
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