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Question - Dropping a Product Line
Pantheon Gaming, a computer enhancement company, has three product lines: audio enhancers, video enhancers, and connection-speed accelerators. Common costs are allocated based on relative sales. A product line income statement follows:
Pantheon Gaming Income Statement For the Year Ended December 31, 2011
Audio
Video
Accelerators
Total
Sales
$1,045,000
$2,255,000
$2,200,000
$5,500,000
Less cost of goods sold
575,000
1,240,000
1,870,000
3,685,000
Gross margin
470,000
1,015,000
330,000
1,815,000
Less other variable costs
56,900
70,700
24,900
152,500
Contribution margin
413,100
944,300
305,100
1,662,500
Less direct salaries
158,100
177,700
68,200
404,000
Less common fixed costs:
Rent
11,970
25,830
25,200
63,000
Utilities
4,370
9,430
9,200
23,000
Depreciation
5,890
12,710
12,400
31,000
Other administrative costs
79,230
170,970
166,800
417,000
Net income
$153,540
$547,660
$23,300
$724,500
Since the profit for accelerator devices is relatively low, the company is considering dropping this product line.
Determine the impact on profit of dropping accelerator products.
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