MANAGEMENT ACCOUNTING & CONTROL

SHORT TERM NON-ROUTINE DECISIONS

Lesson Activity 18. Eliminate or Continue a Product Line

The following data were taken from Jimena Company. Based on these data, the
management of Jimena is considering to eliminate product line B. They assumed that by
operating only product line A and C, the company will have higher profits.

Product A Product B Product C

Sales 100,000 200,000 300,000
Cost of Sales
Materials 25,000 80,000 75,000
Labor 20,000 50,000 40,000
Variable overhead 10,000 15,000 20,000
Fixed overhead 5,000 35,000 15,000
Total 60,000 180,000 150,000
Gross Margin 40,000 20,000 150,000
Selling and Administrative
Variable 12,000 10,000 30,000
Fixed 8,000 30,000 40,000
Total 20,000 40,000 70,000
Net Income (Loss) 20,000 (20,000) 80,000

It was determined that if product line B is discontinued, 60% of the fixed overhead can be
avoided and 50% of fixed selling and administrative expenses can also be avoided.

Required:

Based on the above data, should product line B be eliminated? Why or why not. Present
your solution.

Answer:
Product B should not be eliminated, because the direct margin segment is
positive/income so the segment should still be continued.
Solution:

For Product B:

Sales ₱ 200,000
Less: Variable Cost 145,000
Variable Selling and Administrative 10,000
Contribution Margin ₱ 45,000
Fixed Costs:
Direct – all avoidable 35,000
Indirect (allocated on sales) 30,000 The ₱30,000 is an
Income (Loss) (20,000) indirect cost that is
from the allocation
of the company that
Contribution Margin ₱ 45,000 cannot be changed.
Direct – all avoidable 35,000
₱ 10,000 Direct segment is still an income.