CHARLES SPORTS EQUIPMENT (Dropping a product line) Charles Sports Equipment manu
ID: 2387381 • Letter: C
Question
CHARLES SPORTS EQUIPMENT (Dropping a product line) Charles Sports Equipment manufactures round, rectangular, and octagonal trampolines. Data on sales and expenses fro the past month follow:
Trampoline
Total RoundRectangular Octagonal
Sales $1,000,000$ 140,000 $ 500,000 $ 360,000
Less variable expenses 410,000 60,000 200,000 150,000
Contribution margin 590,000 80,000 300,000 210,000
Less fixed expenses
Advertising-traceable 216,000 41,000 110,00065,000
Depreciation of special equip%u2019t 95,000 20,000 40,000 35,000
Line supervisors%u2019 salaries 19,000 6,000 7,000 6,000
General factory overhead*200,000 28,000 100,000 72,000
Total fixed expenses 530,000 95,000 257,000 178,000
Net operating income(loss)$ 60,000 $ (15,000) $ 43,000 $ 32,000
*A common fixed cost that is allocated on the basis of sales dollars
Management is concerned about the continued losses shown by the round trampolines and wants a recommendation as to whether or not the line should be discontinued. The special equipment used to produce the trampolines has no resale value. If the round trampoline model is dropped, the two line supervisors assigned to the model would be discharged.
REQUIRED:
1. Should production and sale of the round trampolines be discontinued? The company has no other use for the capacity now being used to produce the round trampolines. Show computations to support your answer.
2. Recast the above data in a format that would be more useful to management in assessing the long-run profitability of the various product lines.
Explanation / Answer
Operating income would decrease by 33,000 if they drop the round trampoline, so they should keep the segment.
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Trampoline
Total
Round
Rectangular
Octagonal
Sales
1,000,000
140,000
500,000
360,000
Less: Variable expenses
410,000
60,000
200,000
150,000
Contribution margin
590,000
80,000
300,000
210,000
Less: fixed expenses
Advertising - traceable
216,000
41,000
110,000
65,000
Depreciation of special equipment
95,000
20,000
40,000
35,000
Line supervisors' salaries
19,000
6,000
7,000
6,000
Total fixed expenses
330,000
67,000
157,000
106,000
Operating Income (loss)
260,000
13,000
143,000
104,000
Less: common fixed expenses
200,000
Operating income (loss)
60,000
Trampoline
Total
Round
Rectangular
Octagonal
Sales
1,000,000
140,000
500,000
360,000
Less: Variable expenses
410,000
60,000
200,000
150,000
Contribution margin
590,000
80,000
300,000
210,000
Less: fixed expenses
Advertising - traceable
216,000
41,000
110,000
65,000
Depreciation of special equipment
95,000
20,000
40,000
35,000
Line supervisors' salaries
19,000
6,000
7,000
6,000
Total fixed expenses
330,000
67,000
157,000
106,000
Operating Income (loss)
260,000
13,000
143,000
104,000
Less: common fixed expenses
200,000
Operating income (loss)
60,000