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 Round Rectangular Octagonal Sales $1,000,000 $140,000 $500,000 $360,000 Variable Expenses $410,000 $60,000 $200,000 $150,000 Contribution Margin $590,000 $80,000 $300,000 $210,000 Fixed Expenses Advertising traceable $216,000 $41,000 $110,000 $65,000 Depreciation of Special Equip $95,000 $20,000 $40,000 $35,000 Line Supervisors salaries $19,000 $6,000 $7,000 $6,000 General Factory Overhead $200,000 $28,000 $100,000 $72,000 Total Fixed Expenses $530,000 $95,000 $257,000 $178,000 Net Operating Income (Loss) $60,000 $(15,000) $43,000 $32,000 Required 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) 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)

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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	Round	Rectangular	Octagonal
Sales	$1,000,000	$140,000	$500,000	$360,000
Variable Expenses	$410,000	$60,000	$200,000	$150,000
Contribution Margin	$590,000	$80,000	$300,000	$210,000
Fixed Expenses
Advertising traceable	$216,000	$41,000	$110,000	$65,000
Depreciation of Special Equip.	$95,000	$20,000	$40,000	$35,000
Line Supervisors salaries	$19,000	$6,000	$7,000	$6,000
General Factory Overhead	$200,000	$28,000	$100,000	$72,000
Total Fixed Expenses	$530,000	$95,000	$257,000	$178,000
Net Operating Income/(Loss)	$60,000	$(15,000)	$43,000	$32,000

Required

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)
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)