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# Dropping a product line

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ShoppingKart, Inc is a supermarket having thee operating departments. An income statement for the most recent month of operations is listed below.
General Meat Produce Total
Sales \$50,000 \$40,000 \$10,000 \$100,000
Variable Costs 30,000 16,000 5,000 51,000
Contribution Margin 20,000 24,000 5,000 49,000
Fixed Costs:
Direct, avoidable 5,000 4,000 3,500 12,500
Common, allocated based on sales dollars 10,000 8,000 2,000 20,000
Profit(Loss) \$5,000 \$12,000 \$(500) \$16,500

If ShoppingKart, Inc. were to drop the Produce line and make no other changes, income for the month would be?

The space currently being used by Produce could be converted into a Deli Department. If this were done, expected Deli operations are as follows: sales of \$20,000; variable costs of \$8,000; avoidable fixed costs of \$3,000. Assuming no changes for General and Meat departments, income for the month would be?

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#### Solution Preview

1. The income would change by the segment margin, since the common costs would not change. If Produce is dropped there will be a loss of contribution margin ...

#### Solution Summary

The solution explains how to determine the impact on net income of dropping a product line

\$2.19
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## Overhead Costs & Dropping a Product Line

The company manufactures three products. Profit computations for these three products for the most recent year are as follows:

Product X Product Y Product Z Total
Sales \$ 300,000 \$ 700,000 \$ 800,000 \$ 1,800,000
Direct materials (70,000) (150,000) (200,000) (420,000)
Direct labor (50,000) (200,000) (250,000) (500,000)
Manufacturing overhead(100,000)(400,000) (500,000) (1,000,000)
Profit \$ 80,000 \$ (50,000) \$(150,000) \$ (120,000)

The company traditionally allocates manufacturing overhead based on the level of direct labor cost?\$2 of manufacturing overhead are allocated for each \$1 of direct labor cost. However, of the company's \$1,000,000 in manufacturing overhead costs, \$700,000 is directly related to the number of product batches produced during the year. The number of batches of the three products for the year was as follows: Product X, 20 batches; Product Y, 30 batches; Product Z, 50 batches. The remaining \$300,000 in overhead is for facility support (property taxes, security costs, general administration, and so forth). As you can see, the total company loss is \$120,000. In an effort to reduce or eliminate this loss, the company has decided to drop Product Z. What would total company profit (or loss) have been in the most recent year if Product Z had been dropped at the beginning of the year?

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