Problem 3: After a few years of successful business, Thomas saw the need to dive

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Problem 3: After a few years of successful business, Thomas saw the need to diversify his business to take advantage of the growth potential of new markets. Doing so also reduces the business risk. He set up a new company that sells 3 models of tables: Russian style, Italian style, and Mexican style His targeted market was in NYC where there is huge demand for those products. Operating results for October re below Russian ItalianMexican stv stv stv Units sold 4,000 4.500 3.500 1,2000 S36,000 $22,500 S35,000 S$93,500 Variable departmental costs Avoidable fixed costs Unavoidable fixed costs Net income 13,500 17,500 45,000 5,000 15,000 7.000 24.000 S 8,000 4.000) 5.500 9500 14,000 6,000 8,000 4,000 9,000 a.If Italian style is discontinued, management estimates that sales of Russian style will increase by 20%. In good form, prepare an incremental analysis to determine if Italian style should be discontinued. b. What qualitative factors should Thomas consider Should Italian style be discontinued based solely Without creating new income statements, and relating question a. c. on quantitative aspects? Briefly justify your response using your results from your analysis in part A determine the amount of the company's new net income if Italian style is discontinued. Show your calculations

Explanation / Answer

Russian Itilian Mexican Total Russina Per Unit Units 4000 4500 3500 12000 Rev 36000 22500 35000 93500 9 VC 14000 13500 17500 45000 3.5 A - FC 6000 4000 5000 15000 UN FC 8000 9000 7000 24000 NI 8000 -4000 5500 9500 If italian discontiued and russina inc 20% Units 800 sales 9 sales val 7200 V cost 3.5 v csot 2800 Cont 4400 IF we discontinue itilian then additional contribiution of 4400 and avoidable fixed cost of 4000- these are 2 benefits in total 8400 against loss of 4000 in italian Net incremental benefit of 8400 + 4000 = 12400 , Qualitative facotors need to be consider but still itialian product is costly and having no margins for fixed cost hence same has to be discon tinued New income statement Russian Mexican Total Units 4800 3500 8300 Rev 43200 35000 78200 VC 16800 17500 34300 A - FC 6000 5000 11000 UN FC 8000 7000 15000 NI 12400 5500 17900

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