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				$	215,000
Variable expenses:
Variable manufacturing expenses	$	60,200
Sales commissions		23,650
Shipping		6,450
Total variable expenses					90,300
Contribution margin					124,700
Fixed expenses:
Salary of product-line manager		7,750
General factory overhead		43,150	*
Depreciation of equipment (no resale value)		14,500
Advertising—traceable		49,050
Insurance on inventories		3,400
Purchasing department		26,920	↑
Total fixed expenses					144,770
Operating loss				$	(20,070	)

*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?

• Yes

• No

Answer 1

Answer:
(a)
	Keep school knapsack	Drop school knapsack	Net Operating Income
Sales	$ 215,000	$ 0	($215,000)
Variable expenses:
Variable manufacturing expenses	$ 60,200	$ 0	$ 60,200
Sales commissions	$ 23,650	$ 0	$ 23,650
Shipping	$ 6,450	$ 0	$ 6,450
Total variable expenses	$ 90,300	$ 0	$ 90,300
Contribution margin	$ 124,700	$ 0	($124,700)
Fixed expenses:
Salary of line manager	$ 7,750	$ 0	$ 7,750
General factory overhead	$ 43,150	$ 43,150	$ 0
Depreciation of equipment	$ 14,500	$ 14,500	$ 0
Advertising- Traceable	$ 49,050	$ 0	$ 49,050
Insurance on inventories	$ 3,400	$ 0	$ 3,400
Purchasing department	$ 26,920	$ 26,920	$ 0
Total fixed expenses	$ 144,770	$ 84,570	$ 60,200
Net operating Income (loss)	($20,070)	($ 84,570)	($64,500)
(b)
No, Williams Products Inc line should not be discontinued