Decisions about Business Segments You are the accountant for the largest manufacturer of sheet steel. The company’s hottest product is the RX-6, which provides most of the firm’s revenue. Management is considering dropping the RX-5 product line, which hasn’t turned a profit for two consecutive years. The CFO comes to you and asks what you would do given the following data:

1. Distinguish between direct and indirect costs and find the segment profit for each product.
2. Determine the gain or loss that the firm would incur if it dropped the RX-5 product line. What figure would you provide the CFO?
3. Explain your recommendation to continue or discontinue product line RX-5.

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Operating Statements RX-6 RX-5 Total Batches produced and sold 200 240 Sales revenue $30,000 $43,200 $ 73,200 Direct materials (2,000) (8,400) (10,400) Direct labor.... Variable manufacturing overhead Fixed manufacturing overhead Sales and general administrative costs Operating profit (4,000) (7,680) (11,680) (1,000) (4,800) (5,800) (2,000) (17,400) (19,400) (2,000) (6,000) (8,000) $19,000 $ (1,080) $ 17,920 Note: Approximately 20% of the fixed manufacturing overhead is directly related to (i.e., created within) each segment; if the segment is eliminated, 20% of the fixed manufacturing overhead currently allocated to the segment can be eliminated. None of the sales and general administrative costs are directly affected by either product line.