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Country Co. has two departments: ABC, and XYZ, which produce high quality hockey sticks. The company has provide the following information for the month of
Country Co. has two departments: ABC, and XYZ, which produce high quality hockey sticks. The company has provide the following information for the month of April: | ||||
ABC | XYZ | Total | ||
Sales | $ 75,00,000 | $ 22,00,000 | $ 97,00,000 | |
Variable Costs | 38,00,000 | 9,00,000 | 47,00,000 | |
Contribution Margin | 37,00,000 | 13,00,000 | 50,00,000 | |
Fixed Expenses | 30,00,000 | 15,00,000 | 45,00,000 | |
Operating Income (Loss) | 7,00,000 | - 2,00,000 | 5,00,000 | |
Country Co. has conducted an analysis of the costs involving XYZ after a poor performance in April and it was determined that the following would occur if the XYZ department ceased operations: | ||||
1. $500,000 in fixed expenses of XYZ would be eliminated by ceasing operations. The remaining $1,000,000 are sunk costs that cannot be recovered. | ||||
2. The sales in the ABC department would increase 10% if XYZ were to cease operations. | ||||
REQUIRED | ||||
A) What would be the effect on operating income if the XYZ product line is dropped? (5 marks) | ||||
B) Should the XYZ product line be dropped? Briefly explain. (1 mark) | ||||
C) Unrelated to parts A & B of this question, Country Co. is considering using the excess wood used in the production of their hockey sticks to create shooting targets. Currently, the company sells the additional wood for $5.50 per kilogram. If processed into shooting targets, it would cost an additional $6.50 per unit to process and would use 3kg of wood to create. These shooting targets could sell for $30 per target. Currently, the company has 1,500 kilograms of wood that they sell. Should Country make these new shooting targets? (4 marks) |
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