Question

Kenmore Company manufactures two products. Both products have the same sales? price, and the volume of sales is equivalent.? However, due to the difference in production? processes, Product A has higher variable costs and Product B has higher fixed costs. Management is considering dropping Product B because that product line has an operating loss.

Kenmore Company
Income Statement
Month Ended June 30, 2018
	Total	Product A	Product B
Net Sales Revenue	$170,000	$85,000	$85,000
Variable Costs	150,000	77,000	73,000
Contribution Margin	20,000	8,000	12,000
Fixed Costs	30,000	3,000	27,000
Operating Income/(Loss)	$(10,000)	$5,000	$(15,000)

1.	If fixed costs cannot be? avoided, should Kenmore drop Product B? Why or why not? (Use a parenthesis to enter a decrease)

Expected Decrease in revenue ___________________

Expected decrease in total variable costs ___________________

Expected increase (decrease) in operating income ___________________

Kenmore ______________ (should/should not) drop product B because operating income will ______________ (decrease by 12,000/increase by 12,000/decrease by 15,000/increase by 15,000)

2. if 50% of Product B's fixedcosts are avoidable. should Kenmore drop Product B? Why or why not? (Use a parenthesis to enter a decrease)

Expected Decrease in revenue ___________________

Expected decrease in total variable costs ___________________

Expected decrease in fixed costs ___________________

Expected decrease in total costs ___________________

Expected Increase/decrease in operating income ___________________

Kenmore ______________ (should/should not) drop product B because operating income will ______________ (decrease by 15,000/increase by 15,000/decrease by 1,500/increase by 1,500)

Answer 1

1.

Expected decrease in revenue	(85,000)
Expected decrerase in total variable costs	73,000
Expected increase (decrease) in operating income	(12,000)

Kenmore Should not drop product B because operating income will decrease by 12,000.

2.

Expected decrease in revenue	(85,000)
Expected decrease in total variable costs	73,000
Expected decrease in fixed costs	13,500 (27,000*50%)
Expected decrease in total costs	86,500
Expected increase/decrease in operating income	1,500

Kenmore should drop product B because operating income will increase by 1,500.