Relevant costs: dropping a product Merchant Company manufactures and LO 1 sells three models of electronic printers. Ken Gail, president of the company, is considering dropping model JT484 from its product line because the com¬ pany has experienced losses for this product over the last three quarters. The following product-level operating data have been compiled for the most re¬ cent quarter.

In addition, the following information is also available ■ Factory rent and depreciation will not be affected by a decision to drop model JT484.
■ Quarterly utility bills will be reduced from $40,000 to $31,000 if JT484 is dropped.
■ Supervision costs for JT484 can be eliminated if dropped.
■ The maintenance department will be able to reduce quarterly costs by $7000 if JT484 is dropped.
■ Elimination of JT484 will make it possible to eliminate two administrative staff positions with combined salaries of $30,000 per quarter.

REQUIRED

(a) Should Merchant Company eliminate JT484?

(b) Merchant's sales manager believes that it is important to continue to produce JT484 to maintain a full product line. He expects the elimination of JT484 will reduce sales of the remaining two products by 5% each. Will this infor¬ mation change your answer to (a)? Explain.

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CATEGORY Sales TOTAL JT284 JT384 JT484 $1,000,000 $500,000 $200,000 $300,000 Variable costs 600,000 Contribution margin $ 400,000 300,000 $200,000 100,000 200,000 $100,000 $100,000 Fixed costs: Rent Depreciation $ 50,000 $ 25,000 $ 10,000 $ 15,000 60,000 30,000 12,000 18,000 Utilities Supervision Maintenance Administrative 40,000 20,000 5,000 15,000 50,000 15,000 5,000 30,000 30,000 15,000 6,000 9,000 100,000 30,000 20,000 50,000 Total fixed costs $ 330,000 $135,000 $ 58,000 $137,000 Operating income loss $ 70,000 $ 65,000 $ 42,000 ($ 37,000)