Question
Heat Exchangers Total Round Rectangular Octagonal Sales $1,000,000 $140,000 $500,000 $360,000 Less variable expenses $410,000 $60,000 $200,000 $150,000 Contribution margin $590,000 $80,000 $300,000 $210,000 Less
Heat Exchangers | ||||
Total | Round | Rectangular | Octagonal | |
Sales | $1,000,000 | $140,000 | $500,000 | $360,000 |
Less variable expenses | $410,000 | $60,000 | $200,000 | $150,000 |
Contribution margin | $590,000 | $80,000 | $300,000 | $210,000 |
Less fixed expenses: | ||||
Advertising | $216,000 | $41,000 | $110,000 | $65,000 |
Depreciation | $95,000 | $20,000 | $40,000 | $35,000 |
Line supervisors' salaries | $19,000 | $6,000 | $7,000 | $6,000 |
General factory overhead* | $200,000 | $28,000 | $100,000 | $72,000 |
Total fixed expenses | $530,000 | $95,000 | $257,000 | $178,000 |
Net operating income (loss) | $60,000 | $(15,000) | $43,000 | $32,000 |
*A common fixed cost that is allocated on the basis of sales dollars |
Analyze the above information to determine if the round heat exchanger should be discontinued. The special equipment that is used to produce the round heat exchanger has no resale value. If the round heat exchanger is discontinued, the two line supervisors who are assigned to the model would be discharged. Overall Manufacturing Company has no other use for the capacity that is now being used to produce the round heat exchanger.
Include the following in your analysis:
- Should the production and sale of the round heat exchanger be discontinued? Show your analysis to support your answer.
- How might this same information be presented to make it more useful to management in assessing the long-run profitability of its various product lines?
- What policy change would you recommend to management?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started