CONTINUING A PRODUCT LINE

Aquilino Inc. produces two types of rowing machines, the Deluxe and the Regular

models. A recent segmented income statement is shown below.

Sales

Less: Variable costs

Contribution margin

Less:

Direct fixed costs

Segment Margin

Regular

$ 160,000

120,000

40,000

Common fixed costs (allocated)

Deluxe

$ 240,000

160,000

80,000

Total

$ 400,000

280,000

120,000

L

52,000

68,000

60,000

$8,000

32,000

20,000

8,000

60,000

10,000

50,000

Net income (Loss)

$(2.000) $10,000

* Direct fixed costs are direct with respect to the product lines.

**Allocated fixed costs relate to costs incurred at the company-wide level which are

allocated to all products.

REQUIRED:

1. Determine if Aquilino should drop the Regular model. How much better or worse

off would the company OVERALL be if it was discontinued?

2. Assume that $10,000 of common fixed costs could be saved if the Regular line is

dropped. Should the model be dropped NOW?/nSELL OR PROCESS FURTHER

Jeffers Inc. has decided to discontinue its Basic model DVD player. They currently have

a number of partially completed units on hand that have incurred $50 of costs per unit.

They could complete them incurring the following additional unit costs:

Direct materials

$10

Direct labor

$20

Variable overhead

$5

Fixed overhead

$30

The fixed costs relate to depreciation on plant assets.

If Jeffers completes the DVD players they can be sold at $100 per unit. However,

another company is willing to buy the DVD players as is for $60.

REQUIRED:

1. What should Jeffers do?

2. By how much is this preferable to the next best alternative?