Question

Garrett Company provided the following information:

Answer 1

Answer:

Overall operating profit will decrease by $25,000

Price is $32.5

Explanation:

A product should be shut down if doing so would make the savings in fixed costs associated with the product to exceed the lost contribution. Other wise , the product should remain.

In a shut down decision , the following relevant cash flows should be considered:

1. Lost contribution from the product to be shut down

2. Savings in fixed directly attributable to the product under consideration.

                                                                                          $

Lost contribution from products 2  

(15-10)× 20,000                                                            (100,000)

Savings in direct fixed cos                                           75,000

Net loss from the drop of product 2                          (25,000)

Overall operating profit will decrease by $25,000

Mark up is the proportion of cost as profit

Price = cost + (mark-up %×  cost

Price = 25 + (30%× 25) = 32.5

Price is $32.5