7. Analyzing a Keep or Drop Decision EPI is considering eliminating a product fr

Question

7. Analyzing a Keep or Drop Decision EPI is considering eliminating a product from its ToddTwn Tours collection, This collection is aimed at children one to three ycars of age and includes "tours" of a hypothetical town. Two products, The Pet Store Parade and The Grocery Getaway, have impressive sales. However, sales for the third CD of the collection, The Post Office Polka, have lagged the others. Several other CDs are planned for this collection, but none is ready for production. EPI's information related to the Toddlston Tours collection follows: Pet Store Post Office Parade Getaway Polka Sales revenue Variable costs Contribution margin 50,000 $45,000 $15,000 $110,000 23,000 19 10 Allocatod fixed costs Profit (loss) 5 7,800 $10,400 $(20 EPI has determined that elimination of the Post Office Polka (POP) program will not impact sales of thoe other two items. Additionally, total fixed cost will be reduced by only S1,500. The remaining fixed overhead currently allocated to the POP program Required: 1. Determine what will happen to the company's total profit, if EPI drops the POP product. What is your will be redistributed to the remaining two products. recommendation about the elimination? Supposc that the full amount of fixed overhead (S5,200) allocated to POP is avoidable. Would your recommendation to EPI change? Why or why not? 2.

Explanation / Answer

1 Loss in contribution margin if POP is dropped -5000 Avoidable fixed costs 1500 Change in profits -3500 IF POP is dropped, profit reduces by $3500, so it is recommended not to drop POP 2 Loss in contribution margin if POP is dropped -5000 Avoidable fixed costs 5200 Change in profits 200 IF POP is dropped, profit increases by $200, so it is recommended to drop POP

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