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Discontinuing a Product, Department, or Store

You're evaluating products to potentially discontinue manufacturing. Use the following information to determine whether it makes sense to stop manufacturing any of your products:

$\backslash$table$[[,$Baby Bottles,Blankets,Pacifiers,Total$],[$Sales Revenue,$100,000,75,000,80,000,255,000],[$Less Variable Expenses,$50,000,40,000,30,000,120,000],[$Contribution Margin,$50,000,35,000,50,000,135,000],[$Fixed Costs,$25,000,45,000,20,000,90,000],[$Operating Income,$25,000,(10,000),30,000,45,000]]$

Which product should be discontinued, why?

Blankets, because it causes a $$10,000$ loss in the operating income.

$2.$ Only $$25,000$ of fixed costs can be eliminated if the product is discontinued. The remaining fixed costs for the product are unavoidable. What are the remaining fixed costs for the product? What will happen to operating income if the underperforming product is discontinued and nothing is done with the freed capacity.

The remaining fixed costs for the product would come to $$20,000.$ The operating income will remain unchanged unless the freed capacity is allocated.

$3.$ Management is thinking about taking the freed capacity from discontinuing their prior product, to create baby formula. Sales of baby formula are expected to bring in $$100,000$ of contribution margin, with an addition $$30,000$ in fixed costs. What will happen to operating income if baby formula is manufactured with the freed capacity?