The following data is for Archery Unlimited, a maker of bows used by archery ent
ID: 2485987 • Letter: T
Question
The following data is for Archery Unlimited, a maker of bows used by archery enthusiasts. All fixed costs are unavoidable regardless of the products offered, and Archery sells all the products it produces each year.
Beginner Intermediate Advanced
Unit Selling price $40 $200 $400
Unit variable cost $35 $ 80 $120
Total fixed cost $60,000 $200,000 $245,000
Annual volume 7,000 4,000 3,000
Required:
1.) Perform differential analysis to determine what will happen if the company drops the Beginner product.
2.) What would be your recommendation, regarding dropping of the Beginner product? Give a least 2 supporting reasons for your recommendation. 3.) Give 1 qualitative factor that would be a consideration in your decision.
Explanation / Answer
Beginner Intermediate Advanced Unit Selling price $ 40 200 $400 Unit variable cost $ 35 80 120 Contributon margin 5 120 280 Annual volume 7000 4000 3000 Total contribution margin 35000 480000 840000 Less Total fixed cost $ 60000 200000 245000 Profit (loss) -25000 280000 595000 overall Profit (loss) 850000 If we dropp Begniners -60000 280000 595000 815000 1 If Company drops the beginner product then it will save the loss of $ 25000, but it had to incurred the fixed Cost of $ 60000, in such case its loss will increase by $ ( 60000-25000)= $ 35000. So its not advisable for the company to dropp this product untill unless we can use this production facality and use the fixed cost for production on another products. in simpal words if we can use the fixed cost in other product then we can decide tp dropp the product. 2 if we compare the the overall profit in both the situaton then again it will advisable that not drope the production of begniner, since the overall profit is also decreasing. 3 Only one factor that decide the dropping factor is Fixed cost, if company really want to be in profit then it has to produce ( 60000/5) at lease 12000 unit to recover its fixed cost.
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