Question

Decision to Discontinue a Product

On the basis of the following data, the general manager of Foremost Footwear Inc. decided to discontinue Children’s Shoes because it reduced income from operations by $10,000. What is the flaw in this decision if it is assumed that fixed costs would not be materially affected by the discontinuance?

Foremost Footwear Inc. Product-Line Income Statement For the Year Ended April 30, 20Y7
	Children's Shoes			Men's Shoes			Women's Shoes			Total
Sales		$165,000			$300,000			$500,000		$965,000
Costs of goods sold:
Variable costs	$105,000	$150,000	$220,000	$475,000
Fixed costs	32,000	60,000	120,000	212,000
Total cost of goods sold	$137,000	$210,000	$340,000	$687,000
Gross profit	$28,000	$90,000	$160,000	$278,000
Selling and adminstrative expenses:
Variable selling and admin. expenses	$21,000	$45,000	$95,000	$161,000
Fixed selling and admin. expenses	17,000	20,000	25,000	62,000
Total selling and admin. expenses	$38,000	$65,000	$120,000	$223,000
Income (loss) from operations	$(10,000)	$25,000	$40,000	55,000

If the children Shoe's are discontinued, the company's would by $.

Answer 1

Particulars	Children's Shoes ($)
Sales	165,000
Less : Variable cost ($105,000 + $21,000)	(126,000)
Contribution	39,000
Less Fixed Cost ( $32,000 + $17,000)	(49,000)
Loss from operations	(10,000)

Note : If Children’s Shoes to discontinue then there will be no variable cost as there is no slales & therefore there shall be no contribution . Thus the total fixed cost of $49,000 ( $32,000 + $17,000) which is unavaidable will a total loss if Children’s Shoes to discontinue.

Loss from operations of Children’s Shoes = $(10,000)

Loss if Children’s Shoes to discontinue = $(49,000)

Increase in loss if he children's Shoes is discontinue = $49,000 - $10,000 = $39,000

If the children Shoe's are discontinued, the company's profit would decrease by $39,000.