Question

Blaine Avenue Company manufactures three products. Profit computations for these three products for Year 1 are given below.

                                                        Product X            Product Y            Product Z

Sales                                                 $300,000             $700,000             $800,000

Direct materials                                  (70,000)            (150,000)            (200,000)

Direct labor                                        (50,000)            (200,000)            (250,000)

Manufacturing Overhead                 (100,000)            (400,000)            (500,000)

Profit                                                  $80,000            ($50,000)          ($150,000)

Blaine Avenue has a total of $1,000,000 in manufacturing overhead costs. Of this amount, $700,000 is directly related to the number of product batches produced during the year. The number of batches of the three products for Year 1 was as follows: Product X, 20 batches; Product Y, 30 batches; Product Z 50 batches. The remaining $300,000 in overhead is for facility support (property taxes, security costs, general administration, etc.) and doesn’t not vary at all with the level of activity. What would total company NET INCOME be if the Product X line were dropped? Assume that Blaine Avenue has no other costs or expenses except those described here.

loss of $270,000 profit of $30,000 loss of $120,000 profit of $40,000 profit of $300,000 profit of $180,000 $0 – no profit or loss loss of $160,000

Answer 1

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			Product Y	Product Z	Total
Sales			$     700,000	$     800,000	$   1,500,000
Direct Materials			$   (150,000)	$   (200,000)	$     (350,000)
Direct Labor			$   (200,000)	$   (250,000)	$     (450,000)
Manufacturing Overhead:
Directly Related	$700,000/100 Batches*30		$   (210,000)	$   (350,000)	$     (560,000)
	$700,000/100 Batches*50
Facility Support					$     (300,000)
Profit/(Loss)					$     (160,000)
Loss of $160,000