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Decision to Discontinue a Product On the basis of the following data, the general manager of Foremost Footwear Inc. decided to discontinue Childrens Shoes because
Decision to Discontinue a Product
On the basis of the following data, the general manager of Foremost Footwear Inc. decided to discontinue Childrens Shoes because it reduced income from operations by $10,000. What is the flaw in this decision if it is assumed that fixed costs would not be materially affected by the discontinuance?
Foremost Footwear Inc. Product-Line Income Statement For the Year Ended April 30, 20Y7 | ||||||||||
Children's Shoes | Men's Shoes | Women's Shoes | Total | |||||||
Sales | $165,000 | $300,000 | $500,000 | $965,000 | ||||||
Costs of goods sold: | ||||||||||
Variable costs | $105,000 | $150,000 | $220,000 | $475,000 | ||||||
Fixed costs | 32,000 | 60,000 | 120,000 | 212,000 | ||||||
Total cost of goods sold | $137,000 | $210,000 | $340,000 | $687,000 | ||||||
Gross profit | $28,000 | $90,000 | $160,000 | $278,000 | ||||||
Selling and adminstrative expenses: | ||||||||||
Variable selling and admin. expenses | $21,000 | $45,000 | $95,000 | $161,000 | ||||||
Fixed selling and admin. expenses | 17,000 | 20,000 | 25,000 | 62,000 | ||||||
Total selling and admin. expenses | $38,000 | $65,000 | $120,000 | $223,000 | ||||||
Income (loss) from operations | $(10,000) | $25,000 | $40,000 | 55,000 |
If the Children Shoe's are discontinued, the company's income would decrease by $.
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