Question
3. Following table shows sales and cost information for the preceding month for the Discount Drug Company and its three major product lines drugs, cosmetics,
3. Following table shows sales and cost information for the preceding month for the Discount Drug Company and its three major product lines drugs, cosmetics, and housewares. Among the fixed expenses, Utilities, Depreciation, Rent, and General Administrative expenses are overhead costs that are allocated across the segments and would continue even if the company drops a segment. Using cost-benefit analysis, show whether the company should continue or discontinue the Houseware segment.
Product Line | ||||
Total | Drugs | Cosmetics | Houseware | |
Sales | $250,000 | $125,000 | $75,000 | $50,000 |
Variable expenses | $105,000 | $50,000 | $25,000 | $30,000 |
Contribution margin | $145,000 | $75,000 | $50,000 | $20,000 |
Fixed expenses: |
|
|
| |
Salaries | $54,000 | $29,500 | $12,500 | $12,000 |
Advertising | $16,000 | $1,000 | $7,500 | $7,500 |
Utilities | $2,000 | $500 | $500 | $1,000 |
Depreciation | $5,000 | $1,000 | $2,000 | $2,000 |
Rent | $20,000 | $10,000 | $6,000 | $4,000 |
Insurance | $3,700 | $2,000 | $500 | $1,200 |
General Administrative | $30,000 | $15,000 | $9,000 | $6,000 |
Total fixed expenses | $130,700 | $59,000 | $38,000 | $33,700 |
Net operating income | $14,300 | $16,000 | $12,000 | ($13,700) |
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