Please explain your answer in a bit of detail, as I\'m trying to learn how to do
ID: 2379247 • Letter: P
Question
Please explain your answer in a bit of detail, as I'm trying to learn how to do the probelm as well as simply get the answer.
Keith Inc. has 4 product lines: sour cream, ice cream, yogurt, and butter. Demand of individual products is not affected by changes in other product lines. 30% of the fixed costs are direct, and the other 70% are allocated. Results of June follow:
(See Table Below.)
Prepare an incremental analysis of the effect of dropping the sour cream product line. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).
Sour Cream
Ice Cream
Yogurt
Butter
Total
Units sold
2,000
500
400
200
3,100
Revenue
$ 10,000
$ 20,000
$ 10,000
$ 20,000
$ 60,000
Variable departmental costs
6,000
13,000
4,200
4,800
28,000
Fixed costs
5,000
2,000
3,000
7,000
17,000
Net income (loss)
$ (1,000 )
$ 5,000
$ 2,800
$ 8,200
$ 15,000
Explanation / Answer
Original revenue: 60,000
Adjusted revenue (after dropping sour cream): 60,000-10,000 = 50,000
Incremental revenue: -10,000
Original variable departmental costs: 28,000
Adjusted variable departmental costs (after dropping sour cream): 28,000-6,000 = 22,000
Incremental variable departmental cost savings: 6,000
Original fixed costs: 17,000
Adjusted fixed costs (after dropping sour cream): 17,000-5,000*30% = 15,500
Incremental fixed cost savings: 1,500
Incremental increase in net income: -10,000+6,000+1,500 = -2,500
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