Pantheon Gaming, a computer enhancement company, has three product lines: audio
ID: 2387380 • Letter: P
Question
Pantheon Gaming, a computer enhancement company, has three product lines: audio enhancers, video enhancers, and connection-speed accelerators. Common costs are allocated based on relative sales. A product line income statement follows:Pantheon Gaming
Income Statement
For the Year Ended December 31, 2011
Audio Video Accelerators Total
Sales $1,045,000 $2,255,000 $2,200,000 $5,500,000
Less cost of goods sold
575,000
1,240,000
1,870,000
3,685,000
Gross margin 470,000 1,015,000 330,000 1,815,000
Less other variable costs
56,900
71,500
20,400
148,800
Contribution margin 413,100 943,500 309,600 1,666,200
Less direct salaries 157,800 177,600 67,100 402,500
Less common fixed costs:
Rent 11,970 25,830 25,200 63,000
Utilities 4,370 9,430 9,200 23,000
Depreciation 5,890 12,710 12,400 31,000
Other administrative costs 79,230
170,970
166,800
417,000
Net income
$153,840
$546,960
$28,900
$729,700
Since the profit for accelerator devices is relatively low, the company is considering dropping this product line.
Determine the impact on profit of dropping accelerator products.
$
Is this better off or worse off?
Explanation / Answer
The contribution margin for accelerators is 305,700. Subtract salaries of 67,300 and you have the product line contributing 238,400 toward offsetting the fixed costs of the firm. You don't say if any of the remaining costs would go away if the product line were dropped, but assuming less than 238,400 would, the company is better off retaining the product line.
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