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

Question

2. 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.

Assume that the Purchasing Manager of Fulp Associates is able to negotiate with suppliers a lower price for the materials used to produce Product C. Because of the lower purchasing cost, unit variable cost is reduced by 10%. What is the new operating income or loss that Fulp Associates incurs by selling 100,000 units of Product C?   

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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