Part 2: Product Line Decision

The following monthly segmented income statement is for V & T Faces, Inc.:

Foundation Blush Eye Shadow Total

Sales 20,000 15,000 23,000 58,000

Revenue

Variable 11,000 8,000 9,000 28,000

costs

Contribution 9,000 7,000 14,000 30,000

Margin

Direct fixed 3,000 1,500 8,500 13,000

costs

Allocated 2,000 5,000 3,000 10,000

Fixed Costs

Profit 4,000 500 2,500 7,000

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 the foundation, and 37.5 percent to eye shadow. All variable and direct fixed costs for the blush product line will be eliminated.

Required:

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