[golobos2007]

the management of scholer corporation is considering dropping product MC. Data from the company's accounting system appear below:


sales... 550,000
variable expenses... 242,000
fixed manufacturing expenses... 215,000
fixed selling and administrative expenses.. 132,000


all fixed expanses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that 137,000 of the fixed manufacturing expenses and 79,000 of the fixed selling and admin. Expenses are avoidable if product mc is discontinued.

a. what is the net operating income earned by product MC according to the company's accounting system? Prepare a comtribution margin income statement to support your answer.

b. what would be the effect on the company's overall net operating income of dropping product MC? Should the product be dropped? Show work to prove why or why not.



I have no idea how to do this can anyone take me step by step on what to calculate and what to do?

thanks!!

[morgaine300]

Well, first a "contribution margin income statement" (known by other names to me) is just:

Sales
- Variable
=Contribution Margin
- Fixed Costs
=Operating Income

The above is something you absolutely must know in order to do cost-volume-profit stuff.

There are different ways you can go about figuring out what happens if they drop mc. Your text/class may have a specific way it wants this done.

One way is make another column that includes the same information as what I listed above. Only this time only include the items that would remain if mc was dropped. This is the fastest way to your answer. This is actually differential analysis and you're looking at what's the difference if I do this versus doing this.

Think through each line, from top to bottom, i.e. starting with sales. What would sales be if mc were dropped? What would variable cost be? Etc. Take special note of the comments about what happens to the fixed costs... what would be dropped and what would remain?

Then just re-work the math of what's above and see where it ends up in the end.

try it and see what you come up with.