Question

Nadeen Fashions has three product A, B and C. The following information is available:

A B C
Sales $60 000 $38 000 $26 000
Variable costs 36 000 18 000 12 000
Contribution margin 24 000 20 000 14 000
Fixed expenses 12 000 15 000 16 000
Profit (loss)
$12 000 $5 000
$(2 000)

1- Under these circumstances, should Nadeen Fashions drop any of the departments? Give your reasoning.
2- Assuming fixed costs are avoidable, if Nadeen Fashions drops product line C and does not replace it, what effect will this have on profit? What will be the overall profit of the organisation. Show Calculations and provide your justification.

Answer 1

1.
Only Product C has loss, so only Product C has chances of being dropped.
But since it is assumed that fixed costs are not avoidable, there will be incremental loss of $14000 if Product C is dropped.
Therefore no Product should be dropped.

2.
Saving in Fixed Costs = $16000
Contribution Margin lost = $14000
Financial Advantage = $2000

Therefore Product C should be dropped, as there is financial advantage of $2000 and profit will increase by $2000

Overall Profit = $12000+5000 = $17000