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

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?

($310,000)

$31,400

($245,000)

$499,000

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:

Explanation / Answer

Using the incremental approach.

Note: Incremental analyses show only the differences in revenues and costs. Comparative columns or comparative income statements, or a revised income statement showing the net amounts to be reported after the drop are NOT incremental analyses..

Only costs that change between alternatives are incremental. Fixed expenses that are allocated never change.

incemental revenue = gross margin = sales - cost f goods sold[cogs] = $330,000

contribution margin = gross margin - variable costs = $310,000

incremental effect of dropping accelerators:- $245,000

Incremental revenue

$330,000

Incremental costs:

Variable costs savings

-20,000

Direct fixed costs savings

-65,000

Incremental drop in profits if discontinued

($245,000)

Incremental revenue

$330,000

Incremental costs:

Variable costs savings

-20,000

Direct fixed costs savings

-65,000

Incremental drop in profits if discontinued

($245,000)

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