Question $1.$ Prepare an analysis showing whether a product line or other business segment should be added or dropped. $(30$ marks$)$

Information$$s provides below are Sales and information for the preceding month for the Discount Drug Company and its three major product lines$-$drugs, cosmetics$,$ and housewares. A quick review of this scenario suggests that dropping the housewares segment would increase the company$$s overall net operating income by $ $8,000.$ However, this would be a flawed conclusion because the data in the problem do not distinguish between fixed expenses that can be avoided if a product line is dropped and common expenses that cannot be avoided by dropping any product line.

In this scenario the two alternatives under consideration are whether to keep the housewares product line or drop it$.$ If the housewares line is dropped, then the company will lose $$20,000$ per month in contribution margin because all this segment$$s sales and variable expenses will be eliminated. However, by dropping the housewares line it may be possible to avoid some fixed costs such as salaries or advertising costs. If dropping the housewares lines enables the company to avoid more in fixed costs that it loses in contribution margin, then it would be financially advantageous to eliminate the product line. On the other hand, if the company is not able to avoid as much in fixed costs as it loses in contribution margin, then the housewares lines should be kept. Thus, the company$$s managers need to focus their attention on identifying the costs that differ between the two alternatives. $($i$.$e$.,$ that can be avoided by dropping the house wares product line$).$ They should be asking themselves $$What cost can be avoid if we avoid if we drop this product line?$-$while purposely ignoring any cost that do not differ between the alternatives.

To show how to proceed in a product$-$line analysis, suppose that Discount Drug company has analyzed the fixed cost being charged to the three product lines and determined the following.

$1.$ The Salaries expenses represent salaries paid to the employees working directly on the product.

$2.$ The advertising expense represents advertisements that are specific to each product line.

$3.$ The utilities expense represents utilities cost for the entire company. The amount charged to each product line is an allocation based on space occupied.

$4.$ The depreciation expense represents depreciation on previously purchased fixtures that are used to display the various product line. Although the fixtures are nearly new, they are custom$-$built and will have no resale value if the housewares line is dropped.

$5.$ The rent expense represents rent on the entire building housing the company.

$6.$ The insurance expense is for insurance carried on inventories with each of the three product lines. If housewares is dropped $,$ the related inventories will be liquidated and the insurance premiums will decrease proportionately.

$7.$ The general administrative expense represents the costs of accounting $,$ purchasing, and general management, which are allocated to the product lines on the basis of sales dollars. These cost will not change if the housewares line is dropped.

Required:

$1.$ With this information prepare an analysis showing the cost associated with the decision is relevant or irrelevant.

$2.$ Justify the reason why the cost is relevant or irrelevant.

$3.$ Explain in short what is the Financial advantage $($disadvantage$)$ of discontinuing the particular product line.