Based on the results, the company is thinking of discontinuing Product C. If Pro

Question

Based on the results, the company is thinking of discontinuing Product C. If Product C is discontinued, 1] the factory space released from the production of Product C could be leased to Glory Ltd for $3,000 per month. 2] sales of Product B would increase by 18 percent. 3] $12,000 of fixed manufacturing cost could be avoided.
In addition, Product A is a complement of Product B and research findings have previously shown that a 50 percent change in the sales of Product B would result in a 10 percent change in the sales of Product A due to complementary effect.
Required:
a] explain the concept of relevant cost and revenue b] prepare a differential analysis report to determine whether Product C should be discontinued. A B C Sales Variable cost Allocated fixed cost Profit/loss) $100,000 $90,000 $70,000 58,00050,000 35,000 30,000 10,000 | 20,000 40,000 (5,000)| 22,000 |

Explanation / Answer

Relevant costs are those costs that will make a difference in a decision. Relevant costs are future costs that will differ among alternatives.

Relevant costs are decision specific, meaning that a relevant cost may be important in one situation but irrelevant in another. Examples of when management uses relevant costs can be seen when it is determining whether to sell or keep a business unit, make or buy an item, or accept a special order.

Fixed cost bound to occur = 28,000

Revenue from leasing = $3000*12 = 36,000

Increase in net profit of B = (90000-50000)*18% = 7200 (fixed cost not considered since it is a sunk cost)

Increase in net profit of A = (100,000-58,000)*18%/50*10% = 1512  (fixed cost not considered since it is a sunk cost)

Net increase in revenue =

$16,712

Hence product C should be discontinued.

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