Management is concerned about the low profit associated with the blush product line and is considering dropping this product line. Allocated fixed costs are assigned to product lines based on shelf space used by each product line (measured in square feet), resulting in the following percentages for foundation, blush, and eye shadow, respectively: 20 percent, 50 percent, and 30 percent. If the blush product line is eliminated, total allocated fixed costs will be assigned as follows: 62.5 percent to foundation, and 37.5 percent to eye shadow. All variable and direct fixed costs for the blush product line will be eliminated.

1) Perform differential analysis. Assume keeping all product lines is Alternative 1 and dropping the blush product line is Alternative 2.

2) Which alternative is best? Explain.

Summarize the result of dropping the blush product.

Assume the space available from dropping the blush product line can be used by the eye shadow product line, resulting in increased revenues for eye shadow of $12,000 and increased variable costs for eye shadow of $4,000. No additional direct fixed costs would be incurred, and 80 percent of allocated fixed costs would be assigned to eye shadow and 20 percent assigned to foundation.

3) Should the company drop the blush product line and use the freed-up space to expand the eye shadow product line? Alternative 1 assumes all product lines are kept and Alternative 2 assumes the blush product line is dropped with a corresponding expansion of the eye shadow product line.

3 + ales Revenue 6 ariable Costs ontribution Margin Tirect Fixed Costs 8 located Fixed Costs 9 ront 5 Foundation 20.000 11,000 9,000 3.000 2.000 4,000 Blush 15,000 8.000 7.000 1.500 5.000 Eyeshadow 23,000 9.000 14,000 8.500 3.000 2.500 Total $58.000 28.000 30,000 13.000 10,000 7.000 500 10 11 equired: 12 13 erform differential analysis. Assume keeping all product lines is Alternative 1 and dropping the blush product line is Alternative 2 17 15 Vhich alternative is best? Explain * Ummarize the result of dropping the blush product ssume the space available from dropping the blush product line can e used by the eye shadow product line, resulting in increased venues for eye shadow of $12,000 and increased variable costs for ye shadow of $4.000. No additional direct foved costs would be curred, and 80 percent of allocated fixed costs would be assigned peye shadow and 20 percent assigned to foundation hould the company drop the blush product line and use the freed- p space to expand the eye shadow product line? Alternative 1 1 ssumes all product lines are kept and Alternative 2 assumes the lush product line is dropped with a corresponding expansion of the ye shadow product line. 18