Veblen Company manufactures a variety of athletic shoes: basketball, running, an
ID: 2390180 • Letter: V
Question
Veblen Company manufactures a variety of athletic shoes: basketball, running, and tennis. Sales of the tennis shoes have fallen off. Veblen is considering drop the tennis shoe line. Price and cost data are as follows:Basketball Running Tennis Golf Airtennies
Price $90 $65 $40 $60 $70
Variable cost/unit (the order of products is the same for the rest of the numbers)
Basketball $45
Running $40
Tennis $35
Golf $43
Airtennies $50
Fixed costs
$200,000
$210,000
$50,000
$50,000
$90,000
Number of units
10,000
15,000
2,500
25,000
6,000
If the tennis shoe line is dropped, the $50,000 fixed cost is totally avoidable. All variable costs are relevant.
Which alternative (keep or drop the tennis shoe line) is more cost effective?
And by how much (using relevant amounts only)?
Explanation / Answer
if it keeps price of tennis=$40 units=2500 total sale price=2500*40=$100000 variable cost=2500*35=87500 contribution=sale-variable cost 100000-87500=$12500 loss=contribution-fixed cost 12500-50000=(37500) if it drops savings 50000 drop alternative is more cost effective and it can save cost by 50000-(37500)=137500
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