Brantly Company manufactures two products. Both products have the same sales price, and the...
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Brantly Company manufactures two products. Both products have the same sales price, and the volume of sales is equivalent. However, due to the difference in production processes, Product A has higher variable costs and Product B has higher fixed costs Management is considering dropping Product B because that product line has an operating loss.
| Brantly Company Income Statement Month Ended June 30, 2018 |
|||
|---|---|---|---|
| Total | Product A | Product B | |
| Net Sales Revenue | $160,000 | $80,000 | $80,000 |
| Variable Costs | 132,000 | 66,800 | 65,200 |
| Contribution Margin | 28,000 | 14,200 | 13,800 |
| Fixed Costs | 35,000 | 3,500 | 31,500 |
| Operating Income/(Loss) | $(7,000) | $9,700 | $(16,700) |
1. If fixed costs cannot be avoided, should Brantly drop Product B? Why or why not? (Use a minus to enter a decrease)
| Expected Decrease in revenue | _____ |
| Expected decrease in total variable costs | _____ |
| Expected increase (decrease) in operating income | _____ |
Brantly _____ (should/should not) drop product B because operating income will _____ (decrease by _____/increase by _____)
2. If 50% of Product B's fixed costs are avoidable. should Brantly drop Product B? Why or why not? (Use a minus to enter a decrease)
| Expected Decrease in revenue | _____ |
| Expected decrease in total variable costs | _____ |
| Expected decrease in fixed costs | _____ |
| Expected decrease in total costs | _____ |
| Expected Increase/decrease in operating income | _____ |
Brantly _____ (should/should not) drop product B because operating income will _____ (decrease by _____/increase by _____)
Relevant Costs in Eliminating a Product:
The relevant information to take into account when considering the dropping of a product is the loss in sales revenue less any savings in variable and avoidable fixed costs. Unavoidable costs are irrelevant to the decision.
Answer and Explanation: 1
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1
| Expected Decrease in revenue | -$80,000 |
| Expected decrease in total variable costs | 65,200 |
| Expected increase (decrease) in operating income | -$13,8... |
|---|
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Relevant Costs in Eliminating a Product or Segment
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Chapter 9 / Lesson 12
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Products and segments are occasionally eliminated based on the relevant costs that outline all costs affected by a change in production or service. See the role of incremental analysis and fixed cost behavior in an example of eliminating a product.
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