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questions and answers, email theotherwomaninmarriage@gmail.com
TOPIC: DELETING A SEGMENT
Note: This is an Exam
Question – practice it and ask question where you are confused.
QUESTION:
The Other Woman IN Marriage produces three products for
which the following statement has been produced;
|
|
Product
A
(
|
Product
B
(
|
Product
C
(
|
Total
(
|
|
Sales
|
35,000
|
50,000
|
45,000
|
130,000
|
|
Total Costs
|
39,000
|
38,000
|
34,000
|
111,000
|
|
Profit/loss
|
(4,000)
|
12,000
|
11,000
|
19,000
|
The total costs comprise 1/3 variable and 2/3 fixed. The directors consider that as Product shows
loss, it should be discontinued.
Based on the above data;
a)
Should Product A be dropped?
b)
Management decides to drop Product A
c)
Should Product A be dropped if the fixed costs
for A could be delimited?
SOLUTION A:
|
|
Product
A
(
|
Product
B
(
|
Product
C
(
|
Total
(
|
|
Sales
|
35,000
|
50,000
|
45,000
|
130,000
|
|
Variable Cost
|
(13,000)
|
(12,667)
|
(11,333)
|
(37,000)
|
|
Contribution
|
22,000
|
37,333
|
33,667
|
93,000
|
COMMENT:
From the contributions, we can’t discontinue with Product “A”
because it will reduce the total contribution of the products. So we have to
retain it.
Clarification
-
We got the whole figure of sales from the
question.
-
We got the variable from 1/3 x 39,000 = 13,000,
1/3 x 38,000 =12,667 and 1/3x 34,000 = 11,333.
Then 37,000 is the total of all three variable cost. In the question, it
was stated clearly that Total costs comprise of 1/3 variable and 2/3
fixed. We going to work for the fixed
below:
-
Finally, we got the contribution figures above
by subtracting the sales from the variable cost. That is why we put them in
bracket.
SOLUTION B:
|
|
Product
A
(
|
Product
B
(
|
Product
C
(
|
Total
(
|
|
Sales
|
35,000
|
50,000
|
45,000
|
130,000
|
|
Variable Cost
|
(13,000)
|
(12,667)
|
(11,333)
|
(37,000)
|
|
Contribution
|
22,000
|
37,333
|
33,667
|
93,000
|
|
Less Fixed cost
|
(26,000)
|
(25,333)
|
(22,667)
|
(74,000)
|
|
Profit/Loss:
|
(4000)
|
12,000
|
11,000
|
19,000
|
COMMENT:
We can drop product “A” now because it has negative figure
or loss of (4,000). That loss of (4,000)
will definitely reduce our profit. So
the product needs to be discontinued here.
Clarification
-
The Table for Solution B is the same with
Solution A. The Difference is where we
added the row of less fixed cost and the profit.
-
We got the less fixed cost row figures just as
the one of variable costs we compute in Solution A. The only difference is that we used 2/3 in
Fixed Cost.
-
Finally, we got the profit figures by
subtracting contribution from less fixed
costs.
SOLUTION C:
In solution C, we would work on only two Product i.e. Product
B and C because we have dropped or discontinued with Product A.
|
|
Product
B
(
|
Product
C
(
|
Total
(
|
|
Sales
|
50,000
|
45,000
|
130,000
|
|
Variable Cost
|
(12,667)
|
(11,333)
|
(37,000)
|
|
Contribution
|
37,333
|
33,667
|
71,000
|
|
Less Fixed cost
|
(74,000 – 26,000)
|
(48,000)
|
|
|
Profit
|
|
23,000
|
|
COMMENT:
The profit has increased to 23,000 since Product A has been
dropped. That really confirms that
product A, will really reduce the profit of the products so it must be
discontinued.
Clarification
-
The Table above is for Product A, and B. Nothing changed. All the figures for Product A and B to
contribution were retained in this table.
Where we have change is the less fixed cost row. We got 74,000 as the Total Fixed Cost of the
three product (See solution B Table for that figure) and we got 26,000 from Product
A fixed Cost. Therefore, 74,000 – 26,000
will give 48,000. Minus 48,000 from 71,000
which is the contribution for Product A & B will give you profit of 23,000.
Note: Remember to
show your workings please.
Apart from all this stories, this is how your work should
have been.
SOLUTION A:
|
|
Product
A
(
|
Product
B
(
|
Product
C
(
|
Total
(
|
|
Sales
|
35,000
|
50,000
|
45,000
|
130,000
|
|
Variable Cost
|
(13,000)
|
(12,667)
|
(11,333)
|
(37,000)
|
|
Contribution
|
22,000
|
37,333
|
33,667
|
93,000
|
COMMENT:
From the contributions, we can’t discontinue with Product “A”
because it will reduce the total contribution of the products. So we have to
retain it.
SOLUTION B:
|
|
Product
A
(
|
Product
B
(
|
Product
C
(
|
Total
(
|
|
Sales
|
35,000
|
50,000
|
45,000
|
130,000
|
|
Variable Cost
|
(13,000)
|
(12,667)
|
(11,333)
|
(37,000)
|
|
Contribution
|
22,000
|
37,333
|
33,667
|
93,000
|
|
Less Fixed cost
|
(26,000)
|
(25,333)
|
(22,667)
|
(74,000)
|
|
Profit/Loss:
|
(4000)
|
12,000
|
11,000
|
19,000
|
COMMENT:
We can drop product “A” now because it has negative figure
or loss of (4,000). That loss of (4,000)
will definitely reduce our profit. So
the product needs to be discontinued here.
SOLUTION C:
In solution C, we would work on only two Product i.e. Product
B and C because we have dropped or discontinued with Product A.
|
|
Product
B
(
|
Product
C
(
|
Total
(
|
|
Sales
|
50,000
|
45,000
|
130,000
|
|
Variable Cost
|
(12,667)
|
(11,333)
|
(37,000)
|
|
Contribution
|
37,333
|
33,667
|
71,000
|
|
Less Fixed cost
|
(74,000 – 26,000)
|
(48,000)
|
|
|
Profit
|
|
23,000
|
|
COMMENT:
The profit has increased to 23,000 since Product A has been
dropped. That really confirms that
product A, will really reduce the profit of the products so it must be
discontinued.
Note: I am working on Cases 3
& 4 assignments, and will be uploaded soon.
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