Northern States Dairy Inc. has 4 product lines: sour cream, ice cream, yogurt, and butter. The allocated fixed costs are based on units sold and are unavoidable. Demand of individual products is not affected by changes in other product lines. 40% of the fixed costs are direct, and the other 60% are allocated. Results of June follow:

Sour Cream Ice Cream Yogurt Butter Total

Units sold 2,000 500 400 200 3,100

Revenue $10,000 $20,000 $10,000 $20,000 $60,000

Variable costs 6,000 13,000 4,200 4,800 28,000

Fixed costs 6,000 2,000 3,000 7,000 18,000

Net income (loss) $ (2,000) $ 5,000 $ 2,800 $ 8,200 $14,000

Instructions

Prepare an incremental analysis of the effect of dropping the sour cream product line. (Solution: Profits will decrease by $1,600 if the line is dropped)