Question 1
A company has three products: Alpha, beta and gamma. The contribution income statements of the product lines are as follow:
| Product Line | Alpha | Beta | Gamma |
| Sales | $467,000 | $314,000 | $598,000 |
| Variable Costs | 241,000 | 169,000 | 321,000 |
| Contribution Margin | $226,000 | $145,000 | $277,000 |
| Direct Fixed Costs | 91,000 | 86,000 | 112,000 |
| Allocated Fixed Costs | 93,000 | 62,000 | 120,000 |
| Net Income | $42,000 | − $3,000 | $45,000 |
The product manager told the director that product beta has to be dropped as it is making a loss. DO you agree with the product manager? Illustrate your answers.
Question 2
BMM manufactures different car series including 3, 5 and 7 series. The 3 series has shown net operating loss for the past 6 quarters. The income statement for 3 series are shown below:
| Extract of Income Statement | |||||
| For 3 Series | |||||
| Sales | $500,000 | ||||
| Less: variable expenses | |||||
| Variable manufacturing costs | $120,000 | ||||
| Variable shipping costs | 5,000 | ||||
| Commissions | 75,000 | 200,000 | |||
| Contribution margin | $300,000 | ||||
| Less: fixed expenses | |||||
| General factory overhead | $60,000 | ||||
| Salary of line manager | 90,000 | ||||
| Depreciation of equipment | 50,000 | ||||
| Advertising - direct | 100,000 | ||||
| Rent - factory space | 70,000 | ||||
| General admin. expenses | 30,000 | 400,000 | |||
| Net operating loss | $(100,000) | ||||
Investigation has revealed that total fixed general factory overhead and general
administrative expenses would not be affected if the 3 series is dropped. The fixed general factory overhead and general
administrative expenses assigned to this product would be reallocated to other
product lines.
The equipment used to manufacture 3 series has no resale value or alternative use.
Should 3 series be dropped?
