Answers to decision making - keep or drop product line - management accounting. Having issues with your management accounting? SMS 9758-7925 for tuition!

The answers to the questions posted in: 

http://accounting-tuition.blogspot.sg/2014/07/decision-making-keep-or-drop-questions.html

ANS for question 1

If Beta is dropped, there will be loss of revenue from Beta and savings from costs that can be avoided. it can avoid only the variable costs and direct fixed costs of Beta but not the allocated fixed costs since you will have to pay regardless of whether Beta is being dropped or not. Hence:

Contribution Margin Method
Contribution margin loss for dropping  Less: Savings:		$314,000
Variable Costs	$169,000
Direct Fixed Costs	$86,000	$255,000
Net loss		$59,000

Therefore, the product line should not be dropped. 

ANS for question 2

Contribution Margin Method
Contribution margin loss for dropping			$(300,000)
Less: savings
Salary of line manager	$90,000
Advertising - direct	100,000
Rent - factory space	70,000		260,000
Net loss			$(40,000)

Therefore, the product line should not be dropped.