Swanton Company currently sells 3 products and details of revenues and costs are
ID: 2503688 • Letter: S
Question
Swanton Company currently sells 3 products and details of revenues and costs are given below. The company is thinking of discontinuing the production of paper clip holders. However, because many customers buy the products as a set, Swanton estimates that the sales of the other two products will decrease by 20%.[1]
Desk
Calendars Pen sets Paper-clip
Holders
Sales $280,000 $240,000 $33,000
Variable costs 160,000 160,000 38,000
Direct fixed costs 40,000 20,000 10,000
Indirect fixed costs 30,000 40,000 16,000
1. Should the paper clip holders division be discontinued?
2.What is the net benefit or net loss of dropping the production and sale of paper clip holders?
[1] IBID
Explanation / Answer
Profit when all 3 products are produced = (280000 - 160000 - 40000 - 30000) + (240000 - 160000 - 20000 - 40000) + (33000 - 38000 - 10000-16000)
Profit = 50000 + 20000 - 31000 = $39000
If paper clip board division is discounted,
Sales of other two product will decrese by 20%
For calendars,
Sales = 0.8* 280000 = 224000
Variable cost = 0.8* 160000 = 128000
Direct FC = 40000 ( since, FC is independent of quantity)
Indirect FC = 30000
For pent sets
Sales = 0.8* 240000 = 192000
Variable cost = 0.8* 160000 = 128000
Direct FC = 20000 ( since, FC is independent of quantity)
Indirect FC = 40000
Net profit = (224000 - 128000 - 40000 - 30000) + (192000 - 128000 - 20000 - 40000) = 26000 + 4000 = $ 30,000
Paper clip holder division should not be discontinued, it must be continued
2. Net loss of dropping the production and sale of paper clip holders is 39000 - 30000 = $9000
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