Part B Dropping a Product (14 points) Cassidy and Holly Sports Equipment manufactures Round, Rectangular and Octagonal trampolines. Data on sales and expenses for the past month follow: Total $1,000,000 $410,000 $590,000 Round $140,000 $60,000 $80,000 Rectangular $500,000 $200.000 $300,000 Octagonal $360,000 $150,000 $210,000 Sales Variable Expenses Contribution Margin Fixed Expenses Advertising - traceable Depreciation of Special Equip. Line Supervisor's salaries General Factory Overhead Total Fixed Expenses Net Operating Income/(Loss) $216,000 $95,000 $19,000 $200,000 $530,000 $60,000 $41,000 $20,000 $6,000 $28,000 $95,000 $(15,000) $110,000 $40,000 $7,000 $100,000 $257,000 $43,000 $65,000 $35,000 $6,000 $72,000 $178,000 $32,000 Required 1. Management is concerned about the continued losses shown by the round trampolines and wants a recommendation as to whether or not the product line should be discontinued. Assuming the special equipment used to produce the round trampolines has no resale value and that the two line supervisors assigned to the model would be discharged if the product line was discontinued, write a short memo to management recommending whether or not to drop the round trampoline product? Assume that the advertising is traceable to the product and could be avoided, however, the general factory overhead relates to common costs and cannot be avoided if we dropped the product. Also assume that the company has no use for the capacity now being used to produce the round trampolines. (7 points) 2. Is the depreciation on the special equipment used to produce the round trampolines relevant for the above decision? Why/Why not? If there was a resale value for the special equipment, would that be relevant? Why/Why not?!3 points) If the idle capacity from dropping the round trampoline could be used to produce 1,000 rectangular trampolines which could be sold at $100 per unit and there is demand for these rectangular trampolines, would this effect your decision in requirement 1. Assume there will be no additional advertising necessary to sell these 1,000 units. (4 points)