Dropping a Product Line
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PROBLEM 7-9. Dropping a Product Line
Pantheon Gaming, a computer enhancement company, has three product lines: audio enhancers, video enhancers, and connection-speed accelerators. Common costs are allocated based on relative sales. A product line income statement
follows:
Pantheon Gaming
Income Statement
For the Year Ended December 31, 2011
Audio Video Accelerators Total
Sales $1,045,000 $2,255,000 $2,200,000 $5,500,000
Less cost of goods sold 575,000 1,240,000 1,870,000 3,685,000
Gross margin 470,000 1,015,000 330,000 1,815,000
Less other variable costs 53,000 69,000 20,000 142,000
Contribution margin 417,000 946,000 310,000 1,673,000
Less direct salaries 155,000 175,000 65,000 395,000
Less common fixed costs:
Rent 11,970 25,830 25,200 63,000
Utilities 4,370 9,430 9,200 23,000
Depreciation 5,890 12,710 12,400 31,000
Other administrative costs 79,230 170,970 166,800 417,000
Net income $ 160,540 $ 552,060 $ 31,400 $ 744,000
Since the profit for accelerator devices is relatively low, the company is considering dropping this product line.
Required
a. Determine the impact on profit of dropping accelerator products.
b. Discuss the potential qualitative effects of discontinuing the sale of accelerator products.
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Solution Summary
The solution explains how to decide if a product line should be dropped
Solution Preview
a. We need to calculate the loss of contribution margin if accelarator products are dropped with the cost savings. If accelerator products are dropped we would save the direct ...
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