You are the accountant for the largest manufacturer of sheet steel. The company€™s hottest product is the RX-6, which provides most of the firm€™s revenue. Management is considering dropping the RX-5 product line, which hasn€™t turned a profit for two consecutive years. The CFO comes to you and asks what you would do given the following data:

Note: Approximately 20% of the fixed manufacturing overhead is directly related to (i.e., created within) each segment; if the segment is eliminated, 20% of the fixed manufacturing overhead currently allocated to the segment can be eliminated. None of the sales and general administrative costs are directly affected by either product line.
1. Distinguish between direct and indirect costs and find the segment profit for each product.
2. Determine the gain or loss that the firm would incur if it dropped the RX-5 product line. What figure would you provide the CFO?
3. Explain your recommendation to continue or discontinue product lineRX-5.

Transcribed Image Text:

Operating Statements Total RX-6 RX-5 Batches produced and sold. 200 $32,000 (1,800) (4,200) (2,000) (1,000) 250 $ 45,000 $ 7,000 (10,800) (12,200) (7,000) (18,000) Sales revenue Direct materials. Direct labor. Variable manufacturing overhead Fixed manufacturing overhead (9,000) (8,000) (5,000) (17,000) Operating Statements RX-6 RX-5 Total (3,500) (6,500) Sales and general administrative costs. (10,000) Operating profit. $ 19,000 $ (500) $19,500