Real-world companies often seek to reduce the complexity of their operations in an attempt to increase profits. In 2012, Procter & Gamble (P&G) believed it could increase the company’s profits by eliminating some product-lines. In 2017, P&G announced that it had “divested, discontinued, or consolidated 105 brands.” As a result, even though its sales had decreased by 22 percent from 2012 to 2017, its profit as a percentage of sales had increased by 55 percent. Other companies have also tried to improve their financial performance by downsizing. In November 2017, General Electric announced it would begin a downsizing operation that would result in their exiting businesses using over $20 billion in assets in the next one to two years. In January 2018, Newell Brands, the company whose products include Tupperware, Sharpie pens, Elmer’s Glue, and Rawlings sports products, announced it would be reducing its product offerings to the extent that it would close half of its facilities and reduce it revenues by 20 percent.

Required

a. Identify some costs savings these companies might realize by reducing the number of items they sell or use in production. Be as specific as possible, and use your imagination.

b. Consider the additional information presented as follows, which is hypothetical. All dollar amounts are in thousands, unit amounts are not. Assume that P&G decides to eliminate one shampoo product- line, Luster, for one of its segments that currently produces three products. As a result, the following are expected to occur:

(1) The number of units sold for the segment is expected to drop by only 125,000 because of the elimination of Luster, since most customers are expected to purchase an Anagen or Catagen product instead. The shift of sales from Luster to Anagen and Catagen is expected to be evenly split. In other words, the sales of Anagen and Catagen will each increase by 50,000 units.

(2) Rent is paid for the entire production facility, and the space used by Luster cannot be sublet.

(3) Utilities costs are expected to be reduced by $40,000.

(4) All of the supervisors for Luster were all terminated. No new supervisors will be hired for Anagen or Catagen.

(5) Half of the equipment being used to produce Luster is also used to produce the other two products and its depreciation cost must be absorbed by them. The remaining equipment has a remaining a book-value of $340,000 and can be sold f or only $60,000.

(6) Facility-level costs will continue to be allocated between the product lines based on the number of units produced.

Prepare revised product-line earnings statements based on the elimination of Luster. It will be necessary to calculate some per-unit data to accomplish this.

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Product-Line Earnings Statements (Dollar amounts are in thousands) Annual Costs of Operating Anagen Catagen Luster Total Each Product Line Sales in units 450,000 450,000 $900,000 225,000 $450,000 1,125,000 $2,250,000 Sales in dollars $900,000 Unit-level costs: Cost of production Sales commissions 85,500 11,700 85,500 46,200 217,200 29,400 47,250 13,500 307,350 11,700 6,000 Shipping and handling Miscellaneous 20,250 18,000 4,500 9,000 6,750 124,200 2,250 63,450 Total unit-level costs 119.700 Product-level costs: Supervisors' salaries 9,600 7,200 2,400 19.200 Facility-level costs: Rent Utilities Depreciation on equipment Allocated companywide expenses 100,000 112,500 400,000 100,000 50,000 56,250 200,000 250,000 112,500 400,000 281,250 1,000,000 22,500 22,500 635,000 761,900 $138,100 11,250 56,250 Total facility-level costs 635,000 317,500 383,350 $ 66,650 1,587,500 Total product cost 768,800 1,914,050 $ 335,950 Profit on products $131,200