ABC Ltd. is concerning about its poor performance and considering whether or not dropping the production and sells of product R, which incurs losses of Birr 4000. 

Additional information:

♦The salaries expense represents salaries paid to employees working directly on a product

♦The advertising expense represents product-advertising specific to each product line.

♦The depreciation expense represents depreciation on fixtures used for display of various product lines and has no resale value.

♦The rent expense represents rent on the entire building and is allocated to product lines. 

 The monthly rent Birr 13,000 for total depreciation is fixed under long-term lease agreement.

♦ The insurance expense represents insurance carried on inventories whit in each product line.

Required: Should ABC Ltd. Drop the product line R? Show your calculations.

4. ABC Ltd. manufactures three products R, S and T. Sales, cost and operating income information for the preceding month for each separate product line and for the total are given in Birr as follows. Product Line R S I Total Sales 60,000 50,000 70,000 180,000 Variable costs 40,000 25,000 45,000 110,000 Contribution Margin 20,000 25,000 25,000 70,000 Less Fixed expenses: Salaries 10,000 8,000 7,000 25,000 Advertising 4,000 3,000 5,000 12,000 Depreciation Fixture 3,000 4,000 2,000 9,000 Rent 4,000 4,000 5,000 13,000 Insurance 3,000 2,000 1,000 6,000 Total fixed expenses 23,000 19,000 20,000 65,000 Operating income (4000) 4,000 5,000 5,000