Reference no: EM132853823
Question - Palmer Co. manufactures a variety of athletic shoes: basketball, running, and tennis. Sales of the tennis shoes have fallen off. Palmer is considering several options: (1) drop the tennis shoe line; (2) replace the tennis shoe line with golf shoes; or (3) retool the tennis shoe line to make "Airtennies." Price and cost data are as follows:
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Basketball
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Running
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Tennis
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Golf
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Antennies
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Price
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$90
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$65
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$40
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$50
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$70
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Variable cost/unit
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$45
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$40
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$35
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$43
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$50
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Fixed costs
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$200,000
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$210,000
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$50,000
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$50,000
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$90,000
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Number of units
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10,000
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15,000
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2,500
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25,000
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5,000
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If the tennis shoe line is dropped, the $50,000 fixed cost is totally avoidable.
Required -
1. Calculate the impact on operating income, using relevant amounts only, for keeping the tennis shoe line.
2. Calculate the impact on operating income, using relevant amounts only, for option 1.
3. Calculate the impact on operating income, using relevant amounts only, for option 2.
4. Calculate the impact on operating income, using relevant amounts only, for option 3.
5. Which option is best?
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