Reference no: EM131792035

Problem

Tarmac Co., Inc., has prepared the following product-line income data:

		Product
	Total	A	B	C
Sales	$ 100,000	$ 50,000	$ 20,000	$ 30,000
Variable expenses	60,000	30,000	10,000	20,000
Contribution Margin	40,000	20,000	10,000	10,000
Fixed Expenses:
Rent	5,000	2,500	1,000	1,500
Depreciaiton	6,000	3,000	1,200	1,800
Utilities	4,000	2,000	500	1,500
Supervisor salaries	5,000	1,500	500	3,000
Maintenance	3,000	1,500	600	900
Administrative expenses	10,000	3,000	2,000	5,000
Total Fixed expenses	33,000	13,500	5,800	13,700
Net Operating Income	$ 7,000	$ 6,500	$ 4,200	$ (3,700)

The following additional information is available:

* The factory rent of $1,500 assigned to Product C is avoidable if the product were dropped.
* The company's total depreciation would not be affected by dropping C.
* Eliminating Product C will reduce the monthly utility bill from $1,500 to $800.
* All supervisors' salaries are avoidable.
* If Product C is discontinued, the maintenance department will be able to reduce monthly expenses from $3,000 to $2,000.
* Elimination of Product C will make it possible to cut two persons from the administrative staff; their combined salaries total $3,000.

Required:

Prepare an analysis showing whether Product C should be eliminated.

Product C              Relevent Cost
Variable Expense    20000
Factory Rent          1500
Utility                    700(1500-800)
Maintenance           1000(3000-2000)
Admin                   3000
Total                     26200
Sales                    30000

Total Savings =3800(3000-26200)   As the relevant cost of product C is less than earning, the company should not eliminate product C.