Question

CONTINUING A PRODUCT LINE

Aquilino Inc. produces two types of rowing machines, the Deluxe and the Regular models. A recent segmented income statement is shown below.

                                                                                    Regular          Deluxe              Total__

               Sales                                                        $ 160,000      $ 240,000      $ 400,000

               Less: Variable costs                                 120,000        160,000        280,000

               Contribution margin                                  40,000           80,000         120,000

               Less:

                     Direct fixed costs                                   32,000            20,000            52,000

               Segment Margin                                            8,000            60,000           68,000

                     Common fixed costs (allocated)          10,000            50,000            60,000

                    

               Net income (Loss)                                    $ ( 2,000 )      $ 10,000      $     8,000

* Direct fixed costs are direct with respect to the product lines.

**Allocated fixed costs relate to costs incurred at the company-wide level which are allocated to all products.

REQUIRED:

1. Determine if Aquilino should drop the Regular model. How much better or worse off would the company OVERALL be if it was discontinued?

2. Assume that $10,000 of common fixed costs could be saved if the Regular line is dropped.   Should the model be dropped NOW?

Answer 1

	Regular model
Contribution margin lost	($40,000)
Add : Savings from avoidable fixed costs	$32,000
Net income decrease	($8,000)

The answer is worse off by $8,000

-----------------------------------------

	Regular model
Contribution margin lost	($40,000)
Add : Savings from avoidable fixed costs	$42,000 ($32,000+$10,000)
Net income decrease	$2,000

The answer is No