Making a decision to add or drop a product. The income statement for the Caldwell Manufacturing Company appears below. Management is concerned over the loss on Product C.

Materials and labor are variable costs. Manufacturing overhead is applied at the rate of 50 percent of the direct labor cost. Variable overhead is 10 percent of the direct labor cost. Fixed overhead totals $29,000 per month. Variable operating expenses are 20 percent of the sales dollars. Fixed operating expenses total $45,000.
The fixed overhead costs and operating expenses are expected to continue if Product C is dropped.
Instructions 1. Prepare an income statement using direct costing to show the effects of retaining Product C. You must first compute the variable manufacturing costs by product.
2. Prepare an income statement using direct costing to show the effects of dropping Product C.
3. Explain what decision should be made and why.

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CALDWELL MANUFACTURING COMPANY Income Statement (Absorption Costing) Year Ended December 31, 19X1 PRODUCT A PRODUCT B PRODUCT C TOTAL Sales $62,500 $225,000 $37,500 $325,000 Cost of Goods Sold Materials $ 7,500 $ 37,500 $ 5,000 $ 50,000 Labor 12,500 50,000 10,000 72,500 Manufacturing Overhead 6,250 25,000 5,000 36,250 Total $26,250 $112,500 $20,000 $158,750 Gross Margin $36,250 $112,500 $17,500 $166,250 Operating Expenses 25,000 62,500 22,500 Net Income or (Loss) $11,250 $ 50,000 $(5,000) 110,000 $ 56,250