I need help solving my practice test for my final, Please show the work Morrow c

Question

I need help solving my practice test for my final, Please show the work

Morrow company produces and soils ceramic. Hand Beam Co has three product lines A. B. and C. The income statement from last year is presented below. Product line fixed cost can he avoided if the product line is discontinued. Common fixed costs are allocated based on revenues and can he avoided only it Beam CO. goes out of business entirely. The amounts indicated are for an entire year of operations. Assume management is considering investing in advertising for either product B or product C. It will cost S8000 for advertising. Management estimates that the advertising expenditure will increase sales by 20% for product B. or 10% tor product C. Assuming advertising can be done for only one product line, which product should be advertised and why? Management is considering dropping Product Line A because it is unprofitable. Assuming the prior years results are typical, discuss the effect this decision would have on the profitability of Beam co. Make sure you support your decision with computations. If the Facilities currently used to produce Product A can be subleased to another company $20,000, per year after dropping product A with no other changes in cost, might this change your decision7 Make sure you support your decision with computations.

Explanation / Answer

Answer:

A. If the management wants to incure advertising expenses it must incure it for Product B becasue the advertisement will result in increase in sales of B by 20% that means the increase in contribution will also be 20% that is $ 24,000 (20% of $ 120,000) will added to the Companies Profit. However, in case of Product C the sales and the contribution will go up by only 10% and will add $ 20,000 (10% of $ 200,000) to the Companies Profit.

The management shall incure advertisement expense for Product B.

B. Product A has a contribution margin of $ 60,000 and fixed costs associated with the product line are $ 50,000. That means the Product line adds $ 10,000 to the Comapnies total profit. The common costs cannot be avoided by discountinuing Product A. Hence, it is not advisable to discontinue Product A. Dropping of Product A will result is decrease of Companies overall profitability by $ 10,000.

C. If leasing out the facility currently used to produce Product A will earn $ 20,000 per year for the Company then, it is advisable to lease out the facility and drop Product A. This will result an increase of $ 10,000 to Companies overall profitability.

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