(Product line decision) The management of Montgomery Steel Corporation pro¬ duces three products: wire, tubing, and sheet metal. The company is currently contemplating the elimination of the tubing product line because it is showing a pretax loss. An annual income statement follows.

a. Should corporate management drop the tubing product line? Support your answer with appropriate schedules.

b. How would the pretax profit of the company be affected by the decision?LO1

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MONTGOMERY STEEL CORPORATION INCOME STATEMENT FOR YEAR ENDED AUGUST 1, 1998 (IN THOUSANDS) SHEET PRODUCT WIRE TUBING METAL TOTAL Sales $2,200 $1,600 $1,800 $5,600 Cost of sales (1,400) (1,000) (1,080) (3,480) Gross margin $ 800 $ 600 $ 720 $2,120 Avoidable fixed and variable costs $ 630 $ 725 $ 520 $1,875 Allocated fixed costs 90 80 105 275 Total fixed costs $ 720 $ 805 $ 625 $2,150 Operating income (loss) $ 80 $ (205) $ 95 $ (30)