TGY Group Ltd. has three major product lines, pastries, doughnuts, and muffins. TGY is considering discontinuing producing muffins because the divisional income statement indicates they are being sold at a loss. The most recent annual income statement is outlined below:

Pastries Doughnuts Muffins

(000s) (000s) (000s)

Sales $48,330 $44,980 $26,230

Variable Costs 16,500 19,600 12,700

Fixed Costs 21,800 24,400 18,300

Operating Income $10,030 $ 980 ($4,770)

The fixed costs include fixed costs directly attributable to each product line as well as allocated common costs. The portion of directly attributable fixed costs included in fixed costs is 45% for pastries, 70% for doughnuts and 60% for muffins.

Required:

Should TGY Group Ltd. discontinue the product line of muffins? Explain why or why not. Show all supporting calculations. It is a good idea to restate the statement to help you show your support.