Discontinuing Product Lines:

The Scio Division of Georgetown, Inc., manufactures and sells four related product lines. Each product is produced at one or more of the three manufacturing plants of the division. The product-line profitability statement for this year shows a loss for the baseball equipment line. A similar loss is projected for next year.

The baseball equipment is manufactured in the Evanston plant. Some football equipment and all miscellaneous sports items also are processed through this plant. A few of the miscellaneous items are manufactured, and the remainder are purchased for resale. The item purchased for resale is recorded as materials in the records. A separate production line is used for each product line.

The cost schedule presents the costs incurred at the Evanston plant. Inventories at the end of the year were substantially identical to those at the beginning of the year. Management of Georgetown. Inc., requested a profitability study of the baseball equipment line to determine if the line should be discontinued. The marketing department of the Scio Division and the accounting department at the plant have developed the following additional data to be used in the study:

1. If the baseball equipment line is discontinued, the company will lose approximately 10 percent of its sales in each of the other lines.

2. Equipment now used in the manufacture of baseball equipment cannot be used elsewhere in the company. It has a book value of $105,000 and a remaining useful life of five years. If sold today, it would have no salvage value.

3. The plant space now occupied by the baseball equipment line could be closed off from the rest of the plant and rented for $175,000 per year.

4. If the line is discontinued, the supervisor of the baseball equipment line will be released. In keeping with company policy, he would receive a one-time sever- ance payment of $5,000.

Required: Should Georgetown, Inc., discontinue the baseball equipment line? Support your answer with appropriate calculations and qualitative arguments.

Transcribed Image Text:

Football SCIO DIVISION Product-Line Profitability (in thousands) Equipment $2,200 Sales revenue Cost of goods sold: Materials Labor and variable overhead Fixed overhead Total Gross profit Marketing costs: Variable Fixed Corporate administration costs Total Operating profit Baseball Equipment Hockey Equipment Miscellaneous Sports Items Total $1,000 $1,500 $500 $5,200 300 965 600 1,860 EE2 88 48 100 1,000 500 300 100 36 436 $ 64 8888 g8 775 3,600 1,600 1,040 300 120 1,460 $ 140