Question

Decision to Discontinue a Product

On the basis of the following data, the general manager of Foremost Footwear Inc. decided to discontinue Children’s Shoes because it reduced income from operations by $10,000. What is the flaw in this decision if it is assumed that fixed costs would not be materially affected by the discontinuance?

Foremost Footwear Inc. Product-Line Income Statement For the Year Ended April 30, 20Y7
	Children's Shoes			Men's Shoes			Women's Shoes			Total
Sales		$165,000			$300,000			$500,000		$965,000
Costs of goods sold:
Variable costs	$105,000	$150,000	$220,000	$475,000
Fixed costs	32,000	60,000	120,000	212,000
Total cost of goods sold	$137,000	$210,000	$340,000	$687,000
Gross profit	$28,000	$90,000	$160,000	$278,000
Selling and adminstrative expenses:
Variable selling and admin. expenses	$21,000	$45,000	$95,000	$161,000
Fixed selling and admin. expenses	17,000	20,000	25,000	62,000
Total selling and admin. expenses	$38,000	$65,000	$120,000	$223,000
Income (loss) from operations	$(10,000)	$25,000	$40,000	55,000

If the Children Shoe's are discontinued, the company's   would   by $.

Answer 1

Answer- If the Children Shoe's are discontinued, the company's   would loose their contribution by $39000.
Explanation- Contribution earned by Children Shoe product line = Sales-Variable cost of goods sold- variable selling & administrative costs

= $165000-$105000-$21000

= $39000

Hence if the Children Shoe's are discontinued, the company's   the company will loose its profit by $39000, hence Children Shoe product line should not be close because its provides a positive contribution margin. Fixed costs are totally unavoidable hence should be ignored, they will continue to occur whether product line is discontinue or not.