Merchant Company manufactures and sells three models ofelectronic printers. Ken
ID: 2433864 • Letter: M
Question
Merchant Company manufactures and sells three models ofelectronic printers. Ken Gail, president of the company, isconsidering dropping model JT484 from its product line because thecompany has experienced losses for this product over the past threequarters. The following product-level operating data havebeen compiled for the most recent quarter: Category Total JT284 JT384 JT484 Sales 1,000,000 500,000 200,000 300,000 Variablecosts 600,000 300,000 100,000 200,000 Contributionmargin 400,000 200,000 100,000 100,000 Fixed Costs: Rent 50,000 25,000 10,000 15,000 Depreciation 60,000 30,000 12,000 18,000 Utlilites 40,000 20,000 5,000 15,000 Maintenance 30,000 15,000 6,000 9,000 Administrative 100,000 30,000 20,000 50,000 Total fixedcosts 330,000 135,000 58,000 137,000 Operating income(loss) 70,000 65,000 42,000 (37,000) In addition, the following information is alsoavailable: Factory rent and depreciation will not be affected by adecision to drop model JT484. Quarterly utility bills will bereduced from 40,000 to 31,000 if JT484 is dropped. Supervision costs fro JT484 can be eliminated if dropped. Themaintenance department will be able to reduce quarterly costs by7,000 if JT484 is dropped. Elimation of JT484 will make itpossible to eliminate two administrative staff positions withcombined salaries of 30,000 per quarter. a. Should Merchant Company eliminate JT484? b. Merchant's sales manager believes that it isimportant to continue to produce JT484 to maintain a full productline. He expects the elimination of JT484 will reduce salesof the remaining two products by 5% each. Will thisinformation change your answer to (a)? Explain. Merchant Company manufactures and sells three models ofelectronic printers. Ken Gail, president of the company, isconsidering dropping model JT484 from its product line because thecompany has experienced losses for this product over the past threequarters. The following product-level operating data havebeen compiled for the most recent quarter: Category Total JT284 JT384 JT484 Sales 1,000,000 500,000 200,000 300,000 Variablecosts 600,000 300,000 100,000 200,000 Contributionmargin 400,000 200,000 100,000 100,000 Fixed Costs: Rent 50,000 25,000 10,000 15,000 Depreciation 60,000 30,000 12,000 18,000 Utlilites 40,000 20,000 5,000 15,000 Maintenance 30,000 15,000 6,000 9,000 Administrative 100,000 30,000 20,000 50,000 Total fixedcosts 330,000 135,000 58,000 137,000 Operating income(loss) 70,000 65,000 42,000 (37,000) In addition, the following information is alsoavailable: Factory rent and depreciation will not be affected by adecision to drop model JT484. Quarterly utility bills will bereduced from 40,000 to 31,000 if JT484 is dropped. Supervision costs fro JT484 can be eliminated if dropped. Themaintenance department will be able to reduce quarterly costs by7,000 if JT484 is dropped. Elimation of JT484 will make itpossible to eliminate two administrative staff positions withcombined salaries of 30,000 per quarter. a. Should Merchant Company eliminate JT484? b. Merchant's sales manager believes that it isimportant to continue to produce JT484 to maintain a full productline. He expects the elimination of JT484 will reduce salesof the remaining two products by 5% each. Will thisinformation change your answer to (a)? Explain.Explanation / Answer
a. Should Merchant Company eliminate JT484? Note : I think you have missed Supervision Cost in Fixed Costitems for example Total fixed cost for JT284 (25,000 +30,000 + 20,000 + 15,000 + 30,000) is $120,000 but in question itshows $135,000 similarly for JT484 (15,000 + 18,000 + 15,000 +9,000 + 50,000) is $107,000 but in question it shows $137,000. Iassume $30,000 as Supervision cost that is said to be eliminated ifJT484 is dropped from production.
Lost contribution if JT484 is dropped $100,000 Less : Cost Savings Utilities($41,000 - $31,000) ($9,000) Supervision ($30,000) Maintenancedepartment cost ($7,000) Administration(elimination of 2 administrative staff) ($30,000) Decrease in operating income $24,000 As operating income of the Merchant Company will reduce by$24,000, elimination is not supported. _____________________________________________________________________________ b. Merchant's sales manager believes that it isimportant to continue to produce JT484 to maintain a full productline. He expects the elimination of JT484 will reduce salesof the remaining two products by 5% each. Will thisinformation change your answer to (a)? Explain. No, the decision to retain JT484 will only be reinforced bythe sales manager’s comments. Lost contribution if JT484 is dropped $100,000 Less : Cost Savings Utilities($41,000 - $31,000) ($9,000) Supervision ($30,000) Maintenancedepartment cost ($7,000) Administration(elimination of 2 administrative staff) ($30,000) Decrease in operating income $24,000