Merchant Company manufactures and sells three models of electronic printers. Ken Gail, president...


Merchant Company manufactures and sells three models of electronic printers. Ken Gail, president of the company, is considering dropping model JT484 from its product line because the company has experienced losses for this product over the past three quarters. The following product-level operating data have been compiled for the most recent quarter:

Variable costs600,000300,000100,000200,000
Contribution margin400,000200,000100,000100,000
Fixed Costs:
Depreciation60,000 30,00012,00018,000
Utlilites 40,00020,0005,00015,000
Total fixed costs330,000135,00058,000137,000
Operating income(loss)70,00065,00042,000(37,000)

In addition, the following information is also available:

Factory rent and depreciation will not be affected by a decision to drop model JT484. Quarterly utility bills will be reduced from 40,000 to 31,000 if JT484 is dropped. Supervision costs from JT484 can be eliminated if dropped. The maintenance department will be able to reduce quarterly costs by 7,000 if JT484 is dropped. Elimination of JT484 will make it possible to eliminate two administrative staff positions with combined salaries of 30,000 per quarter.

Should Merchant Company eliminate JT484?

Incremental Analysis:

An increase in product categories is a part of diversifying the risk of a downturn in sales revenue and profits. The disadvantage of excess diversification is that drag in sales revenue and to mitigate it is by dropping products based on results of incremental analysis.

Answer and Explanation: 1

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Relevant information considered for calculating the financial impact of discontinuing the JT484 product model

  • There will be a loss of contribution...

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Incremental Analysis: Definition & Examples


Chapter 9 / Lesson 7

Learn about incremental analysis. Understand what incremental analysis is, learn the applications of incremental analysis, and see examples of incremental analysis.

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