Axelrod Company makes three types of t-shirts: Calm, Windy, and Gale. Mr. Brown,

Question

Axelrod Company makes three types of t-shirts: Calm, Windy, and Gale. Mr. Brown, the general manager of the Company is disappointed with low sales and low profitability of Gale and is considering dropping the product. He believes that such a move will allow him to focus more attention to other profitable lines. He discusses this with you and asks for your opinion. You gather the following information about last year’s performance of the three products.

Calm Windy Gale

Units Sold 25,000 18,750       3,750 Selling Price/unit   $30 $32 $39

Production Cost: Direct Materials/unit $10 $10 $15   Direct Labor/unit $14 $14 $21

There is no variable overhead. Annual total fixed overhead amounts to $ 168,000 and will remain the same whether the product line is dropped or retained. The fixed overhead rate established by the company was $ 3.60 per unit. . The analysis provided to Mr. Brown on the basis of which he was considering to drop Gale from the line of products sold was as follows:

:

` Calm           Windy             Gale

Selling Price/unit $30.00          $32.00 $39.00

Direct Materials/unit ($10.00) ($10.00) ($15.00)

Direct Labor/unit ($14.00) ($14.00) ($21.00)

Fixed Overhead/unit ($3.60) ($3.60) ($3.60)

                                                      --------------------------------------------------------------------------

Operating profit per unit $2.40 $4.40 ($0.60)

                                                                =========================================

Given the foregoing information, what advice will you give to Mr. Brown? Explain the conceptual reasoning behind your advice. Also provide numerical analysis to support your explanation.

Explanation / Answer

since The dropping of product "Gale" will have no effect on Fixed overhead That is it will continue to incur whether product is manufactured or not.

Since product "Gale"is yielding positive contribution ,therefore i would suggest mr.Brown to continue the manufacturing of product otherwise it would result in loss of (3.60 * 3750 ) =$ 13500 (fixed overhead).

so Gale should be manufactured.

calm windy Gale selling price 30 32 39 Direct material (10) (10) (15) Direct labor (14) (14) (21) contribution per unit 6 8 3

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