Question #9 oduct lines. Management is considering dropping product line X becau
ID: 2430128 • Letter: Q
Question
Question #9 oduct lines. Management is considering dropping product line X because it is showing a loss. The fixed costs are being BHM Corporation has two pr allocated rather than being tracable to the individual product lines. If product line X is dropped, 25% of the total fixed costs could be eliminated. Product X Product yTotal 105,000 150,000 255,000 Sales Variable Cost 65,000 60,000125,000 Contribution Margi 40.000 90.000 130.000 ixed Cost 41,000 60,000 101,000 Operating Income -1,000 30,000 29,000 1 - If product line X is dropped, what would be the expected total contribution margin for the company? s 2- How much would the company's contribution margin decrease? S 3-iIf product line X is dropped, what would be the expected fixed costs for the company? $ 4- How much would the company's fixed costs decrease? 5- If product line X is dropped what would be the expected operating income for the company? $ s-what is the expected decrease in income if product line X is dropped?sExplanation / Answer
Product X Product Y Total Sales 105000 150000 255000 Variable Cost 65000 60000 125000 Contrbution Margin 40000 90000 130000 Fixed cost 41000 60000 101000 Operating Margin -1000 30000 29000 1 If product X is dropped, expected totam contribution margin for Company shall be equal to the Contribution Margin of Product Y I.E., $90,000 2 The Company's Contribution shall be decreased by $40000 i.e., Contribution for Product X 3 Totax Fixed Cost $101,000 Less: 25% of Fixed Cost -25250 Fixed Cost incurred if product X is dropped $75,750 4 The companys Fixed Cost shall be decreased by $25250 ($101000*25%) 5 Calculation ofOperating Margin, if product X is dropped revised Contribution Margin $ 90,000.00 Less: Revised Fixed Cost $75,750 RevisedOperating Margin $14,250 6 Expected Decrease in Income = Operating Income if both the product are continued - Operating Income of product Xis drpooed = 29000-14250 $14,750