G incorporation a manufacturer of skin care products is considering dropping fro

Question

G incorporation a manufacturer of skin care products is considering dropping from its line Moisturizing Cream, which is currently losing money. Following information of G incorporation's three products are given below. Cleansers & Toners ( Rs ) Moisturizing Cream ( Rs ) Eye Care Creams ( Rs. ) Sales revenue 500.000 300.000 400.000 Less: Variable Cost 230.000 200.000 230.000 Contribution margin 270.000 100.000 170.000 Less Fixed Cost: Separable cost 50.000 59.000 40.000 Common cost 106.000 60.000 85.000 Profit ( loss ) 114.000 ( 19.000 ) 45.000 Required: What do you think that G incorporation should discontinue the product line Moisturizing Cream? Support your answer with complete working.

Explanation / Answer

Profit of Moisturizing Cream before common cost deduction = 100000 - 59000 = $41,000 As the above computed profit is positive, G incorporation should not discontinue the product line Moisturizing Cream. This product line is adding to the company's profit and the common cost would be incurred irrespective of continuance and discontinuance of the product line. It is just that its appropriation has been made such that it results in a loss for the product line. Thus, the product line should not be discontinued.

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