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:

Since the profit for accelerators is relatively low, the company is considering dropping this product line. What is the incremental effect of dropping accelerators?

($310,000)

$31,400

($245,000)

$499,000

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

Explanation / Answer

The Connection speed accelerators contribute positively ($310,000) even though they are incurring losses.
Hence , discontinuing the product would reduce the contribution of the business by $310,000
If the contribution of the remaining two products can be increased by that amount, then the connection speed
accelerators can be dropped.

The qualitative factors to be consideered before taking that decision are :
Whether the idle capacity generated by discontinuing the production of accelerators can be profitably employed
in other lines of production.

Whether discontinuing the production of accelerators would affect the sales of the remaining two products .

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