Home / Questions / EXERCISE 12 10 Dropping or Retaining a Segment LO2 Dexter Products Inc manufactures and se...
EXERCISE 12–10 Dropping or Retaining a Segment [LO2]
Dexter Products, Inc., manufactures and sells a number of items, including an overnight case. The company has been experiencing losses on the overnight case for some time, as shown on the fol- lowing contribution format income statement:
|
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Variable expenses: Variable manufacturing expenses . . . . . . . . . . . . . . . |
$130,000 |
$450,000 |
|
Sales commissions . . . . . . . . . . . . . . . . . . . . . . . . . . |
48,000 |
|
|
Shipping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
12,000 |
|
|
Total variable expenses . . . . . . . . . . . . . . . . . . . . . . . . |
|
190,000 |
|
Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
260,000 |
|
Fixed expenses: |
|
|
|
Salary of product-line manager . . . . . . . . . . . . . . . . . |
21,000 |
|
|
General factory overhead . . . . . . . . . . . . . . . . . . . . |
104,000* |
|
|
Depreciation of equipment (no resale value) . . . . . . . |
36,000 |
|
|
Advertising—traceable . . . . . . . . . . . . . . . . . . . . . . . |
110,000 |
|
|
Insurance on inventories . . . . . . . . . . . . . . . . . . . . . . |
9,000 |
|
|
Purchasing department . . . . . . . . . . . . . . . . . . . . . . . |
50,000† |
|
|
Total fixed expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
330,000 |
|
Net operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
$ (70,000) |
|
*Allocated on the basis of machine-hours. †Allocated on the basis of sales dollars. |
|
|
Discontinuing the overnight cases would not affect the company’s sales of its other product lines, its total general factory overhead, or its total purchasing department expenses.
Required:
Would you recommend that the company discontinue the manufacture and sale of overnight cases? Support your answer with appropriate computations.
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