Question
After the combo washer-dryer has been in production for a few years, an analysis needs to be performed. You must evaluate the performance of all
After the combo washer-dryer has been in production for a few years, an analysis needs to be performed. You must evaluate the performance of all three product lines as management is concerned with the viability of the washer-dryer combination product. They provide you with the latest annual information by-product:
High-End SetEconomical SetW/D
ComboTotalSales $4,700,000$4,060,000$880,000$9,640,000
Labor $(1,250,000)$(1,015,000)$(235,000)$(2,500,000)
Materials $(1,885,000)$(1,220,000)$(315,000)$(3,420,000)
Direct fixed costs $(325,000)$(220,000)$(250,000) $(795,000)
Allocated fixed costs $(650,000)$(650,000)$(650,000) $(1,950,000)
Net Income $590,000$955,000$(570,000) $975,000
Perform an analysis to determine whether to drop or keep the washer-dryer combination product and present your findings, including the steps taken to make your determination. You are also asked to evaluate if the costing methodology is appropriate and, if not, recommend alternative
methods.
Additional information about the Washer and Dryer set when purchased. It does not need to be computed but may help you make a comparison of the initial costs that were used.
- Initial cash outlay is $150,000, no residual value.
- Sales price is expected to be $2,250 per unit, with $595 per unit in labor expense and $795 per unit in materials.
- Direct fixed costs are estimated to run $20,750 per month.
- Cost of capital is 8%, and the required rate of return is 10%.
- They will incur all operational costs in Year 1, though sales are expected to be 55% of break-even.
- Break-even (considering only direct fixed costs) is expected to occur in Year 2.
- Variable costs will increase 2% each year, starting in Year 3.
- Sales are estimated to grow by 10%, 15%, and 20% for years 3 - 5.
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