Question

Adidas manufactures two products; the following contribution format income statement shows that product B is not performing well:

Details	Total	Product G	Product B
Sales	430,000	320,000	110,000
Variable expenses	300,000	210,000	90,000
Contribution margin	160,000	110,000	20,000
Fixed expenses:
Rent	30,000	20,000	10,000
Depreciation	15,000	10,000	5,000
Maintenance	20,000	14,000	6,000
Supervisor salaries	48,000	28,000	20,000
manufacturing overhead	16,000	12,000	4,000
Net Income (loss)	1,000	26,000	(25,000)

Additional Information:

1. Rent is for one plant space where the two products are manufactured.
2. Special equipment of product B will be sold if the product dropped
3. Maintenance expense of product B will be reduced by 5,000
4. Supervisors salaries are avoidable
5. 3,000 of manufacturing overhead will be reallocated to product G

Required:

Conduct a scientific analysis to help Adidas management to decide whether to drop product B or to keep it

Answer 1

	Keep Product B	Drop Product B
Sales	110000	NIL
Variable exp	90000	NIL
Contribution	20000	NIL
Rent	10000	10000
Depr.	5000	NIL
Maintenance	6000	1000
Supervisor Salaries	20000	NIL
Mfg Overhead	4000	1000
Net Income/(Loss)	(25,000)	(12,000)

As the loss after discontinuing Product B is less than the loss if Product B is manufactured, the company shiuld discontinue Product B.

1. Rent is unavoidable cost

2. Special equipment of product B will be sold if the product dropped, hence no depreciation

3. Maintenance expense of product B will be reduced by 5,000

4. Supervisors salaries are avoidable if product is discontinued

5. 3,000 of manufacturing overhead will be reallocated to product G i.e. 1,000 would still be charged to product B