CONTINUING A PRODUCT LINE

Aquilino Inc. produces two types of rowing machines, the Deluxe and the Regular models. A recent segmented income statement is shown below.

Regular Deluxe Total__

Sales $ 160,000 $ 240,000 $ 400,000

Less: Variable costs 120,000 160,000 280,000

Contribution margin 40,000 80,000 120,000

Less:

Direct fixed costs 32,000 20,000 52,000

Segment Margin 8,000 60,000 68,000

Common fixed costs (allocated) 10,000 50,000 60,000

Net income (Loss) $ ( 2,000 ) $ 10,000 $ 8,000

* Direct fixed costs are direct with respect to the product lines.

**Allocated fixed costs relate to costs incurred at the company-wide level which are allocated to all products.

REQUIRED:

1. Determine if Aquilino should drop the Regular model. How much better or worse off would the company OVERALL be if it was discontinued?

2. Assume that $10,000 of common fixed costs could be saved if the Regular line is dropped. Should the model be dropped NOW?