8. Dropping or Retaining a Segment

Williams Products Inc. manufactures and sells a number of items, including school knapsacks. The company has been experiencing losses on the knapsacks for some time, as shown by the contribution format income statement below:

Discontinuing the knapsacks would not affect sales of other product lines and would have no noticeable effect on the company's total general factory overhead or total purchasing department expenses.

Required:

Would you recommend that the company discontinue the manufacture and sale of school knapsacks? Support your answer with appropriate computations.

WILLIAMS PRODUCTS INC. Income Statement-School Knapsacks For the Quarter Ended June 30 225,000 Variable expenses: Variable manufacturing expenses . Sales commissions 000 ..24000 Shiing.... 95,000 130,000 Contribution margin Fixed expenses Salary of product-line manager General factory overhead 0,500 52000* 8000 55,000 4500 25000 overhead.... Purchasing department 165,000 $(35.000) *Allocated on the basis of machine-hours Allocated on the basis of sales dollars