Fulp Associates currently produces three products. Product C is showing a net op

Question

Fulp Associates currently produces three products. Product C is showing a net operating loss as indicated by the following condensed income statement prepared for the year ended December 31, 2009.

Fulp Associates

Product C

Contribution Margin Income Statement

For the Year Ended December 31, 2009

Sales (100,000 units at $3)                       $300,000

Variable costs (100,000 units at $1.85)         185,000

Contribution margin                                  115,000

Fixed costs                                            120,000

Operating loss                                         $ (5,000)

You have been hired by Fulp Associates to help analyze the decision as to whether to eliminate Product C. Upon investigation, you discover that if Product C is eliminated, $45,000 of the fixed costs shown on the above condensed income statement can be eliminated. The remainder of the fixed costs allocated to Product C are common fixed costs that will be allocated to the remaining two products produced by Fulp Associates.

Should Fulp Associates discontinue Product C? Why? Show calculations.

Explanation / Answer

Continue C Discontinue C Contribution 115000 0 Total fixed costs 120000 75000 Operating loss -5000 -75000 If, Product C is discontinued, the fixed cost burden to other 2 products goes up by 70000(75000-5000) So, It is not advisable to discontinue Product C

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