Question

Williams Products Inc. manufactures and sells a number of items, including school knapsacks. The company has been experiencing losses on the knapsacks for some time, as shown by the contribution format income statement below:

WILLIAMS PRODUCTS INC.
Income Statement—School Knapsacks
For the Quarter Ended June 30
Sales				$	200,000
Variable expenses:
Variable manufacturing expenses	$	56,000
Sales commissions		22,000
Shipping		6,000
Total variable expenses					84,000
Contribution margin					116,000
Fixed expenses:
Salary of product-line manager		7,000
General factory overhead		40,000	*
Depreciation of equipment (no resale value)		13,000
Advertising—traceable		48,000
Insurance on inventories		3,100
Purchasing department		25,480	↑
Total fixed expenses					136,580
Operating loss				$	(20,580	)

*Allocated on the basis of machine-hours.
^†Allocated on the basis of sales dollars.

     Discontinuing the knapsacks would not affect sales of other product lines and would have no noticeable effect on the company’s total general factory overhead or total purchasing department expenses.

Required:
a. Compute the increase or decrease of net operating income if the Williams Products Inc line is continued or discontinued. (Input all amounts as positive except Decreases in Sales, Decreases in Contribution Margin, and Net Losses which should be indicated by a minus sign.)

b. Would you recommend that the Williams Products Inc line be discontinued?

Answer 1

Solution a:

Williams Product Inc.
Particulars	Continue	Discontinue	Increase or decrease of net operating income
Sales	$2,00,000	$0	-$2,00,000
Total Variable manufacturing and selling expenses	$84,000	$0	$84,000
Contribution Margin	$1,16,000	$0	-$1,16,000
Fixed Expenses:
Salaries of Product line manager	$7,000	$0	$7,000
Advertising	$48,000	$0	$48,000
Insurance on inventories	$3,100	$0	$3,100
Net Income	$57,900	$0	-$57,900

Solution b:

No, Williams Products Inc line should not be discontinued.