Question

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:
Sour Cream Ice Cream Yogurt Butter Total
Units sold 2,000 500 499 200 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 7,000 2,000 3,000 7,000 19,000
Net income (loss) (3,000) 5,000 2,800 8,200 13,000
Required:
Prepare an incremental analysis of the effect of dropping the sour cream product line.

Answer 1

Answer:

Dropping Sour would lead to a net loss of $(1,900)

Explanation:

To determine whether or not it will be profitable to drop a loss making product, we compare the savings in fixed cost to the lost contribution from dropping it.

It is noteworthy that only the fixed cost attributed to the product would be saved should it be discontinued.

The incremental analysis is done as follows:

Direct fixed cost of Sour = 30%× 7,000 = 2,100

Lost contribution = sales value - variable cost = 10,000-6,000= 4,000

                                                                 $

Lost contribution                                      (4,000)

Savings in fixed cost                               2,100

Net loss in contribution                           (1,900)

Dropping Sour would lead to a net loss of $(1,900)