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Williams Products Inc. manufactures and sells a number of items, including school knapsacks. The company has been experiencing losses on the knapsacks for some time,
Williams Products Inc. manufactures and sells a number of items, including school knapsacks. The company has been experiencing losses on the knapsacks for some time, as shown by the contribution format income statement below: WILLIAMS PRODUCTS INC. Income Statement-School Knapsacks For the Quarter Ended June 30 Sales $250,000 Fixed expenses: Variable expenses: Sales commissions Shipping Total variable expenses Contribution margin Salary of product-line manager General factory overhead Advertising-traceable Insurance on inventories Variable manufacturing expenses $70,000 27,500 7,500 105,000 145,000 9,250 49,450 Depreciation of equipment (no resale value) 17,500 51,150 Purchasing department Total fixed expenses Operating loss 4,000 29,800 161,150 $(16,150) *Allocated on the basis of machine-hours. Allocated on the basis of sales dollars. Discontinuing the knapsacks would not affect sales of other product lines and would have no noticeable effect on the company's total general factory overhead or total purchasing department expenses. Required: a. Compute the Increase or decrease of net operating Income If the Williams Products Inc line is continued or discontinued. (Input all amounts as positive except Decreases in Sales, Decreases in Contribution Margin, and Net Losses which should be indicated by a minus sign.) Sales Variable expenses: Variable manufacturing expenses Sales commissions Shipping Total variable expenses Contribution margin Fixed expenses: Salary of product-line manager General factory overhead Depreciation of equipment Advertising-traceable Insurance on inventories Purchasing department Total fixed expenses Operating loss Difference: Keep School Knapsack Drop School Operating Income Knapsack Increase or (Decrease) b. Would you recommend that the Williams Products Inc line be discontinued? Yes O No
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