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prepare an income statement, Managerial Accounting

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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)

$   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 ?

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