Reference no: EM13909957

Adm2341 manufactures and sells four different products. The following data are extracted from the most recent financial statements:

	Products
	A	B	C	D
Sales Cost of goods sold    Direct materials    Direct labour    Manufacturing overhead S&A expenses Operating income	$2,500,000   300,000 500,000      600,000  300,000 800,000	$2,000,000   400,000 600,000      800,000 300,000 (100,000)	$1,500,000   200,000 400,000      900,000 150,000 (150,000)	mce_markernbsp;  4,000,000   900,000 1,600,000   300,000  500,000 700,000

 

For each product, 50% of manufacturing overhead is variable costs and variable S&A expenses are equal to 10% of sales. The remaining portion includes traceable and common fixed costs.

The company is considering disposing of the Product C since it has been consistently unprofitable for a number of years. Admw2341's Management team approached you for help and advice on this matter.REQUIRED

 

1) Prepare an income statement showing the appropriate performance of each product.

2) Adm2341's Top management asked you to provide them with a "decision rule" they could apply regarding Product C. Identify any additional information needed to implement your "decision rule".

3) To rationalise your decision on Product C, you have collected the following data:

a) If product C is eliminated, Product D annual sales will increase by $10%. The

Variable cost structure and S&A fixed expenses will be unchanged.

b) If Product C is eliminated, Product A annual sales will drop by 10 %. The

Variable cost structure and S&A fixed expenses will be unchanged.

c) If Product C is dropped, the management of the company feels it can save annually a total of $200,000 of fixed manufacturing overhead and S&A expenses.

Do you recommend to Adm2341's Management to drop Product C? Why ? (Show all your calculations).