Superior Gaming, a computer enhancement company, has three product lines: audio

Question

Superior Gaming, a computer enhancement company, has three product lines: audio enhancers, video enhancers, and connection-speed accelerators. Common costs are allocated based on relative sales. A product line income statement for the year ended December 31, 2011 follows: Audio Video Accelerators Total Sales $1,045,000 $2,255,000 $2,200,000 $5,500,000 Less COGS 575,000 1,240,000 1,870,000 3,685,000 Gross margin 470,000 1,015,000 330,000 1,815,000 Less other var costs 53,000 69,000 20,000 142,000 Contribution margin 417,000 946,000 310,000 1,673,000 Less direct salaries 155,000 175,000 65,000 395,000 Less common fixed costs: Rent 11,970 25,830 25,200 63,000 Utilities 4,370 9,430 9,200 23,000 Depreciation 5,890 12,710 12,400 31,000 Other admin costs 79,230 170,970 166,800 417,000 Net income $160,540 $552,060 $31,400 $744,000 Since the profit for accelerators is relatively low, the company is considering dropping this product line. What is the incremental effect of dropping accelerators?

Explanation / Answer

The loss if $310,000 (from the constribution margin) and the savings is $65,000 (from direct salaries).

The profits would reduce by 310,000-65,000=$245,000 if the accelerator products are dropped

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